Bank of England – Rate Hike in Cards?

July 29, 2015

Bank of England has been talking about a possible rate hike for quite some time but so far they have not done anything which is not suprising as most of the major central banks around the globe are either cutting rates or keeping them at extremely low leves. Furthermore, BOE has to take into account the fact that the ECB will keep its QE running until September 2016, which makes the whole rate hike scenario even more unlikely. However, regardless of that, BOE is a good candidate to be one of the first to start the tightening cycle.

Yesterday, UK’s Office of National Statistics released the preliminary 2nd quarter GDP figure, which came in at 0,7%. At first it may not seem like much, especially if you compare it to the US quarterly GDP figures from last year, but looks can be deceiving. UK’s growth has been rather slow but very consistent as you can see from the chart below.

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Stability is everything and UK is a good example here. Furthermore, if go back in time and check the bigger picture from present day to 2002, then you’ll see that 0.7% for United Kingdom is a strong average. This means that current pace in GDP growth seems to be fairly natural for the UK’s economy and that can be considered as a solid sign that things are moving in the right direction. Even during 2006, when the real estate boom was at its peak, UK’s quarterly GDP remained below 1%.

However, a solid quarterly GDP figure alone is not enough to start the tightening cycle, especially when all the other central banks are doing the exact opposite as I already mentioned above. Even if the FED really goes for the rate hike this year, I doubt that Bank of England will follow, simply because of the QE program in Eurozone. But when the ECB ends its massive stimulus program, things may change rather quickly.

Time will tell!

Capital Properties FX
29.07.2015
Kaarel.

Capital Properties FX