Chance of another interest rate hike in May growing

The increase in markets’ expectations for official interest rates that occurred in the build-up to the Monetary Policy Committee’s (MPC’s) February Inflation Report proved justified. The MPC revised up its projections for economic growth, and the language of the minutes and Report itself was more hawkish than that in November. Admittedly, the language was vague, suggesting that monetary policy would need to be tightened “somewhat earlier and by a somewhat greater extent” than had been anticipated in November. Nonetheless, the fact that CPI inflation is not brought back to the 2% target over the three-year forecast, despite the fact that markets are pricing in an additional rate hike compared to November, suggests that more monetary tightening than markets currently expect might be required. We have been forecasting another hike in May since September last year. Investors have been coming round to this view – a hike is now around 65% priced in. And if we are right in thinking that the economy will continue to surprise the MPC on the upside, then rates are likely to rise faster than markets think further ahead too. Indeed, we expect three hikes in interest rates this year, and two more in 2019, taking Bank Rate to 1.75%.