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UBS thinks the Bank of England could hike rates again in May – on one condition

  • The Bank of England (BoE) could increase interest rates far sooner than expected, according to UBS.
  • The U.K. central bank's monetary policy committee (MPC) "is expected to raise rates in May, if a transitional deal has been struck," UBS strategist John Wraith sai
Pedestrians walk past the Bank of England (BOE) in the City of London, U.K.
Luke MacGregor | Bloomberg | Getty Images
Pedestrians walk past the Bank of England (BOE) in the City of London, U.K.

The Bank of England (BoE) could increase interest rates as early as May, according to UBS, far sooner than expected by most analysts.

But this will happen only if the U.K. government is able to strike a deal with the European Union over a transition period after it leaves the bloc in March 2019, UBS said.

The U.K. central bank's monetary policy committee (MPC) "is expected to raise rates in May, if a transitional deal has been struck," UBS strategist John Wraith said in a note published Wednesday.

UBS has changed its forecast for the next rate hike, now predicting a 25 basis point hike in May that would take the rate to 0.75 percent. However, the bank's global research unit made its prediction "explicitly conditional on a transitional deal being agreed by March."

The BoE made its first interest rate rise in a decade in November, but has signaled that there would be "very gradual" further increases over the next three years and these would be tied over progress in Brexit negotiations.

Most analysts had thought the next rate rise would come later in 2018 and in November at the earliest, making the UBS note stand out for its May forecast.

UBS said the rates rise could come in May amid a strengthening U.K. economy.

"While we still expect the Brexit process to generate strengthening headwinds for the U.K. economy for a considerable time, the stronger-than-expected outturn for fourth quarter gross domestic product (GDP) and the better momentum the economy starts 2018 with as a result could give the MPC a window of opportunity to raise bank rate by the middle of the year," Wraith wrote.

"However, there are growing doubts about whether the U.K. and EU will agree on a transitional deal by the time of the EU Council Summit in late March, and failure to do so would in our opinion stay the MPC's hand as uncertainty intensifies and the economy slows more materially."

UBS revised its forecasts for U.K. GDP following stronger further quarter growth, seeing growth at 1.4 percent in 2018 and 1.2 percent in 2019 — up from a previous forecast of 1.1 percent for both 2018 and 2019.

"We still expect the pace of growth to slow over the course of 2018, whether a transitional deal is agreed early or not. We believe a near-term resolution would not address the difficulties of arriving at longer term arrangements that are economically favorable to the U.K, nor will it diminish the acute domestic political risks that both increase the complexities of the Brexit negotiations and are likely to keep investment activity subdued."

There are signs that even a slight rate rise is putting off potential homebuyers, with the BoE saying earlier this week that the number of mortgages approved for house purchase in December fell to 61,039 in January, the lowest level since January 2015, following the bank's interest rate rise.