Brexit uncertainty is set to halt another rate hike by the Bank of England

  • Despite the divisions in the Parliament over Brexit, many analysts are expecting the House to approve an exit deal with the EU.
  • This is then expected to lift the current cloud of uncertainty over the U.K. economy — which would give further reasons for a rate hike.

Brexit is still proving to be the big obstacle preventing another rate hike in the U.K.

Bank of England (BOE) policymakers are meeting Thursday but, despite positive economic data, the central bank is unlikely to announce any rate action, analysts have told CNBC.

"If it wasn't for Brexit uncertainty the Bank of England would probably be thinking about putting interest rates up this week," Mike Bell, global market strategist at J.P. Morgan Asset Management, told CNBC via email, adding that interest rates look "unnecessarily low."

In September, the nine BOE rate-setters voted unanimously to hold rates at 0.75 percent. At the time, the BOE highlighted greater market concerns surrounding Brexit.

Since then, there were hopes that a Brexit breakthrough would be achieved in mid-October, ahead of an EU summit. But, those hopes were crushed after a meeting between the two chief Brexit negotiators, where divergences over the Irish border blocked any substantial progress in talks.

As a result, the negotiating teams are still working to find an agreement between the U.K. and the EU on how the former will leave the Union in March. The big deadline is mid-December, when European leaders are due to gather once again. The idea is to have a deal before that time, so that it can then be ratified in the different European parliaments. But at this stage, it is unclear if both sides will strike an agreement before that date.

"The Bank of England is likely to stay on hold at the upcoming meeting and in the near future as Brexit negotiations approach a crucial stage and uncertainty is high," Silvia Dall'Angelo, senior economist at Hermes Investment, told CNBC via email.

"However, the monetary policy committee will likely maintain a mild tightening bias, reiterating that a gradual and limited hiking cycle is appropriate under most Brexit scenarios," she added.

Data released in October showed that annual growth rates for workers' pay increased by 3.1 percent between August 2017 and August of this year — the strongest pace since the fourth quarter of 2008. Including bonuses, the increase was 2.7 percent.

When is the next rate hike?

"The big questions are: will a Brexit deal get through the U.K. Parliament? Will growth surge after a deal? We assume the answers to the big questions are yes and not much. So we expect one BOE hike a year, the next one in May," analysts at Bank of America Merrill Lynch said in a note Wednesday.

Despite the divisions in the Parliament over Brexit, many analysts are expecting the House to approve an exit deal with the EU. This is then expected to lift the current cloud of uncertainty over the U.K. economy — which would give further reasons for a rate hike.

"We expect a relatively soft Brexit deal by the end of the year which could put the monetary policy committee in the mood to raise rates more than once next year," Bell from J.P. Morgan Asset Management told CNBC.

Kallum Pickering, a senior U.K. economist at Berenberg bank, said in a note that he expects two rate hikes per year in 2019 and 2020, despite the market currently pricing in no more than one hike per year.

The BOE has raised rates only once this year, in August.

Eyes on growth, not inflation forecasts

Apart from announcing possible rate changes, the BOE is also due to publish its latest Inflation report on Thursday.

Some analysts argue that the key numbers to look at will be the growth forecasts.

"At this meeting, it may make sense to pay more attention to the GDP (gross domestic product) forecasts than inflation," Pickering from Berenberg said.

"Markets would, and should, take any upgrade to the economic outlook as a hawkish signal," he said.

Dall'Angelo from Hermes is expecting some minor changes to these forecasts. "We might see a modest upgrade to near-term growth forecasts, reflecting strong data on economic activity in the third quarter," she told CNBC.

In the last inflation report, the central bank said that real GDP growth (which has been adjusted for inflation) would average 1.75 percent over the next three years.

The U.K. government presented its budget plan for the coming years on Monday, where it announced several economic stimulus measures. These could give further support for an increase in growth forecasts.