BoE has missed an opportunity to raise rates


Craig Inches, Head of Rates & Cash

22 March 2018

Today’s decision not to raise rates was a missed opportunity in our opinion. With real wage growth moving into positive territory for the first time in over two years, strong retail sales (despite the adverse weather conditions) and some welcome progress on the Brexit negotiations, the uncertainty that has concerned the Bank of England (BoE) in recent months is beginning to be demystified. 
The markets were warned in February that rates would rise “faster and sooner”, the question we’d ask is why the BoE thought it necessary to wait until May. The probability of a rate rise now stands at over 75% following the vote today, sterling has risen in recent weeks from £1.37 to £1.42 and gilt short gilt yields have risen to the highs of the year.  Given these moves and in light of the recent slew of positive data, the economy is clearly ready for a rate hike in May, but it would have been just as ready today! 
In the meantime the Bank continues to buy gilts via the APF facility and is massively distorting the shape of the yield curve, which is detrimental for pension funds and an accident waiting to happen further down the line.

Today’s decision not to raise rates was a missed opportunity in our opinion. With real wage growth moving into positive territory for the first time in over two years, strong retail sales (despite the adverse weather conditions) and some welcome progress on the Brexit negotiations, the uncertainty that has concerned the Bank of England (BoE) in recent months is beginning to be demystified. 

The markets were warned in February that rates would rise “faster and sooner”, the question we’d ask is why the BoE thought it necessary to wait until May. The probability of a rate rise now stands at over 75% following the vote today, sterling has risen in recent weeks from £1.37 to £1.42 and gilt short gilt yields have risen to the highs of the year.  Given these moves and in light of the recent slew of positive data, the economy is clearly ready for a rate hike in May, but it would have been just as ready today! 

In the meantime the Bank continues to buy gilts via the APF facility and is massively distorting the shape of the yield curve, which is detrimental for pension funds and an accident waiting to happen further down the line.

Past performance is no guide to the future. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.