Bank of England is likely to surprise market players with a stronger rate-hike path next year, a strategist at J.P. Morgan Asset Management has said.
The central bank met Thursday and is thought to deliver a much-anticipated rate hike at a time when concerns over Brexit are deepening.
Many analysts have started considering the possibility of a collapse in Brexit negotiations — as both European Union and British policymakers voice preparations for a potential abrupt break-up in March next year.
Recent data has suggested that the U.K. economy might be experiencing a temporary slowdown — but it is still growing, the manufacturing and services sectors are sounding more positive, and the labor market is still resilient with an employment rate as low as 4.2 percent.
“The BoE must demonstrate that it will look through temporary weakness,” Karen Ward, chief market strategist at J.P. Morgan Asset Management, said via email, adding that a rate hike is “likely”.
The BoE will also “indicate that a path of very gradual tightening remains appropriate,” she said.
Although Brexit remains a big uncertainty as negotiations are far from concluded, Ward said that “by the end of the year it will be clear that the U.K. is headed towards a softer Brexit and that the Bank of England will raise rates in 2019 more than the market is currently priced.”
A softer Brexit means that the U.K. will keep close trade links with the rest of the EU. Ward expects “at least” two central bank rate hikes in 2019.
Speaking to reporters, Michael Saunders, a member of the Bank of England’s Monetary Policy Committee, signaled that there could indeed be more hikes than the markets are pricing in.
Market players have factored in a little bit more than one rate hike over the next 12 months. “If the economy plays out as I expect, it may be that rates need to go up a little faster than that,” Saunders said.
Bryn Jones, head of fixed income at Rathbone Brothers, said the Bank of England should use the meeting to increase rates, before unknown factors distort the global economy.
“Down the line, we might have a hard Brexit, who knows, the U.S. could raise rates too aggressively and cause global economic slowdown,” he said.
“The Bank of England have gotten enough firepower yet to cope with those, so I think a few interest rate rises while the economy is going OK, it won’t hurt too much.”
