Kristian Rouz — The Bank of England (BoE) is widely expected to increase base borrowing costs to their highest level in a decade amidst firming economic sentiment, a modest improvement in business activity, and a rise in loan issuance.
According to several new reports, British economists agree the BoE's Monetary Policy Committee (MPC) will hike its interest rates to 0.75 percent this coming Thursday.
The MPC board is expected to vote 7-2 in favor of the move, whilst market participants in the City of London believe the chances are 90 percent that the central bank will move rates.
"They (the MPC) believe that the economy can grow at only 1.5 percent or so before inflation kicks off," Martin Beck of EY ITEM Club said. "There is no slack in the economy and their logic is that it will be worth short-term pain from a rate rise now to prevent inflationary pressures from building up."
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Another reason behind the expectation of a new increase in borrowing costs is rising consumer and business confidence, as the harmful Brexit uncertainty gradually subsides. A new report from the BoE has revealed an acceleration in the UK's housing market — despite the still elevated home prices mortgage approvals rose to their five-month highest last month.
The BoE found commercial British banks approved 65,691 new mortgage loans in June, an increase from 64,684 the previous month. The June data also exceeded previous expectations of some 65,500 mortgage approvals for that month.
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Of late the UK's labor participation rate has been at an all-time high of 75.7 percent, whilst the jobless rate has remained at 4.2 percent, a 33-year low. Meanwhile, wage inflation rose to 2.7 percent, outpacing the gains in prices in the recent months.
"The MPC will hike on the expectation of the economy picking up and positive wage growth accelerating and leading to a build-up of inflationary pressures," Samuel Tombs of Pantheon Macroeconomics said.
Economists said now is the right moment for the BoE to raise rates despite the still modest GDP growth expectations. The central bankers believe inflation is set to gain momentum yet against, despite a recent stabilization in the pound sterling's FX rate.
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This expansion in loan issuance is pointing to a likely ongoing acceleration in overall business activity, suggesting the UK's GDP growth could pick up speed towards the year's end. This is despite the broader macroeconomic data at this point suggesting the British economy has yet to gain momentum amid favorable international and domestic conditions.
"While the latest economic news has not been unequivocally great, now seems as good a time as any for the MPC to press ahead with the process of gradual policy tightening," Ruth Gregory of Capital Economics said.
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The BoE, however, is closely monitoring the latest development in the Brexit talks, and is ready to adjust policy appropriately, according to a recent statement from Governor Mark Carney. He also said Brexit would subtract percentage points from the UK's annual GDP growth potential, which could drop to 1.5 percent instead of 2.5 percent.
This is, however, unless the UK inflation gains further momentum due to the labor market's strength, which appears quite likely at this point.
