Markets confident in November rate hike

More than ten years on from the last increase in Bank Rate, investors expect a move from 0.25% to 0.50% at the Monetary Policy Committee’s meeting on the 2nd November. Indeed, the data have been consistent with the Committee’s condition that the economy continues to “follow a path consistent with the prospect of a continued erosion of slack and a gradual rise in underlying inflationary pressure”. CPI inflation reached 3% in September, above the Bank of England’s previous forecast, and the unemployment rate is below the MPC’s estimate of its equilibrium rate. A Q3 GDP figure of 0.3% or above should seal the deal. That said, while a hike next week is now over 80% priced in, markets are sceptical that this will mark the start of a sustained tightening in policy. But given our relatively upbeat assessment of the outlook for GDP and earnings growth, we expect three further 25bp increases in 2018, taking Bank Rate to 1.25% by year-end.