Belfast Telegraph

Monday 21 April 2014

Strong growth puts early interest rate rise in play

Interest rates could go up more than a year earlier than the Bank of England is forecasting, City of London analysts said yesterday as they responded to strong third-quarter GDP figures.

Under its forward guidance policy, the Bank has said it will not consider a rate rise until unemployment falls below 7 per cent, which it does not expect to happen until the second half of 2016.

But many City economists believe decent growth will help push down the jobless rate and bring a rate rise into play earlier than the Bank of England has pencilled in.

"We expect the first interest rate rise to come at least a year earlier than the late 2016 date the Bank has signalled," Rob Wood of Berenberg said.

Azad Zangana of Schroders added: "All eyes will now turn to the Bank of England, which needs to provide an update on its forward guidance on interest rates." The third-quarter growth of 0.8 per cent – the strongest quarterly growth since 2010 – was slightly higher than the 0.7 per cent expansion predicted by the Bank's Monetary Policy Committee, as revealed by this week's minutes of its October meeting.

The Bank's November Inflation Report, due out on 13 November, is now widely expected to bring forward the date when unemployment falls to 7 per cent. Money markets rates suggest City traders think the first rise in the base rate will come in early 2015.

The GDP estimate from the ONS was exactly in line with City expectations. The pound was given a brief lift when the figures came out, rising to $1.62, but it soon fell back again. "The reaction in sterling was fairly muted, given the data was in line with expectations," said Chris Walker, currency strategist at Barclays. "We think sterling will trade flat in the near term, and we are sceptical it can gain further from here against the dollar."