BoE more likely than not to raise interest rates

Howard Archer, chief economic advisor to the EY ITEM Club, said: “While it has recently become a closer call, we believe the Bank of England is still more likely than not to raise interest rates from 0.50 per cent to 0.75 per cent on Thursday after the August MPC meeting – most probably with a split vote.

“The late-June MPC meeting had seemingly opened the door pretty wide to an August hike with the number of MPC members favouring an immediate rate hike to 0.75 per cent rising to three. The minutes of the meeting were modestly more hawkish.

“However, the odds of an interest rate rise on Thursday look to have now widened given lower-than-expected inflation in June, the recent relapse in earnings growth and heightened political/Brexit uncertainties.

“Supportive to the case for an August rate hike, it looks increasingly probable that GDP growth improved to 0.4 per cent quarter-on-quarter in the second quarter as expected by the Bank of England. This would likely reassure the MPC that the first quarter weakness was largely weather-related. While this is hardly stellar growth, it is back in line with the Bank of England’s view that the economy’s current speed limit is around 1.5 per cent on the supply side. Additionally, the labour market has continued to tighten with the employment rate now at a record high.

“The Bank of England believes that there is little slack left in the economy. So, with the economy growing in line with, or slightly above, its supply-side potential rate and employment rising further, the MPC will likely feel that there is a decent case to start gradually normalising monetary policy.”