UK: On course for a rate hike in H2 2018

5 min
Ana Boata
Ana Boata Senior Economist for Europe

As expected, the Bank of England (BoE) voted to maintain its policy rate at 0.5% but there was an additional vote in favor of a rate hike (6 to 3) than previously. The forward guidance regarding the balance sheet adjustment has also been revised (until the rates reach 1.5% compared to 2%). But we expect this level to be reached at the end of 2020 at the earliest. The hawkish stance of the BoE should limit the downward pressures on the GBP – we expect it to depreciate by -4% and -1% against the USD and EUR (to 1.34 and 1.12), respectively, by end-2018. The BoE considers the strong Q1 slowdown to be only temporary with economic momentum recovering in Q2, thanks to solid employment growth (the unemployment rate was 4.2%, the lowest since 1975), a strong pick-up in retail sales (+3.9% y/y in May), improving consumer confidence in their own future financial situation (+8 points in May, up +4.5 compared to the post-EU referendum average) and higher consumer credit flows. As the next BoE meeting is on 2 August and the Q2 GDP data release on 10 August, we see the BoE rather wait for the confirmation of the expected activity pick-up before raising rates. Hence the next rate hike (+25bp) is expected in November. Overall we expect GDP growth of +1.4% in 2018 and +1.3% in 2019.