“Could the Bank of England be the first to raise rates?”

“Could the Bank of England be the first to raise rates?”

We have all become familiar with looking at charts over the last 12 months - rates of infection, R numbers, country case comparisons - the list goes on. In the latest phase of the ongoing pandemic the chart in focus is one that shows the rate of vaccination by country. Daily updates add to the ‘drama’ of seeing which country is vaccinating the fastest. Thankfully, these programmes should make it extremely likely that national and local lockdowns will become a distant memory, and the pressure on health systems and the heartache caused by the virus will recede. 


Following a terrible 2020, the UK now seems to be doing something rather well, which has been a pleasant surprise to all of us. Vaccination rates are higher than in both the United States and the EU and the resultant sense of optimism is now feeding through to the economy. Business surveys are rising strongly, with the latest Markit Purchasing Managers Survey (PMI) showing manufacturing outlook at a 12-month high and the services outlook just short of a 12-month high. These positive signs arrive at a time when the country is still in national lockdown and large sections of the service economy are still closed. As the economy opens up, we would expect optimism to rise further. Consumer confidence is now just short of pre-Covid-19 levels and, somewhat surprisingly, has risen throughout the current lockdown. House prices are still rising and savings have increased. In a nutshell, the nation is more optimistic and has money to spend.


This brings us to monetary policy. At the most recent Bank of England Monetary Policy Committee (MPC) meeting, it was noted in the minutes that since February (when the last Monetary Policy Report was published) the economic outlook has improved in several ways. In particular, the performance of the UK economy in lockdown has been stronger than expected, UK fiscal policy is more supportive, US fiscal policy is far more expansive than anticipated, the global economy has been stronger and oil prices have been higher. So it seems likely that when the next report is published in May, the MPC will upgrade its outlook for both UK economic growth and inflation. The Bank of England has a primary mandate to keep inflation no higher than 2%. This is now slightly different to the policy-making stance in the United States. The US Federal Open Markets Committee’s Price Stability Metric is defined as an average inflation rate of 2%. The difference is subtle, but this means that if inflation rates rise with the same profile in the two countries, the Bank of England’s mandate should mean that it will consider tightening monetary policy first. 


Undoubtably it is excellent news that the success and the efficacy of a vaccination programme will allow economies and nations to recover from what has been a dreadful year. But as a consequence of the recovery, central banks will eventually start to remove their rock-bottom emergency level of interest rates. It would not be out of the question, given the UK economic revival and its mandate, for the Bank of England to be the first central bank to do so.

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Sandra Holdsworth

Head of Rates, Fixed Income

Sandra Holdsworth is Head of Rates in the Fixed Income team.

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