UK discussing shocking consumers with steep rate hikes
UK rate rise in June on cards after BoE discusses shocking consumers
Wednesday, May 19, 2004 11:26:42 AM
----by Pan Pylas---- LONDON (AFX) - UK homeowners are bracing themselves for another increase in mortgage payments next month after the Bank of England's rate-setting body discussed shocking consumers into reining back their spending. Minutes of the May 6 meeting showed that the nine-member Monetary Policy Committee had a long discussion on the pros and cons of lifting its key repo rate 0.50 points before concluding on the expected 0.25 point hike to 4.25 pct. "The MPC is clearly thinking of picking up the pace of monetary tightening in the coming months and, as such, the chances of the next rate hike coming in June, rather than July's meeting which we currently expect, have increased," said Paul Dales, UK economist at Capital Economics
The markets clearly interpreted the minutes that way, with sterling rallying strongly against the dollar and the euro, while market interest rate expectations rose to above 5.00 pct
The minutes helped push the pound up to above 1.78 usd from a low overnight of 1.7632 usd, while the euro headed back towards day lows of 0.6722 stg
The MPC argued that a 0.50 point hike could have been "warranted" given the central bank's economic forecasts last week, which showed inflation rising above target over two years even if interest rates rise as the market expects
It argued that "more rapid increase in interest rates than the market currently expected" could address some of these concerns about inflation as well as shocking consumers into moderating their indebtedness
However, George Buckley, economist at Deutsche Bank, noted that this does not necessarily mean the MPC thinks interest rates need to rise above what the market is pricing in, but that they meed to get there quicker to generate a more gradual rise in inflation
Nevertheless, Buckley said these minutes were more hawkish than usual, because the discussion of a surprise 0.50 point hike was not limited to "one" or "some" members
"The absence of such attributive wording suggests that the Committee as a whole felt there was a need to discuss a more aggressive tightening," he said
Analysts said the upshot of all this is that the MPC will look to raise rates again before the next Inflation Report in August, provided the economic data continues to come in firm, though March's surprisingly weak industrial production data may mean GDP growth in the first quarter is not revised up from the initial 0.6 pct estimates, as the MPC expects
"These minutes highlight that the MPC is likely to break away from raising rates only on Inflation Report months, as has been the case since November," said Buckley, who predicts rates at 5.00 pct by the year-end
Even analysts who expected a more modest rise in interest rates cannot ignore the message from today's minutes
Alan Castle, economist at Lehman Brothers and one of the handful of economists still predicting a rate peak of 4.50 pct, conceded that the chances of another 0.25 point hike in June has risen to 40 pct
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