Is the BOE Really Ready to Hike Rates This Year?!

Newsflash! The BOE MPC meeting minutes are out and it looks like policymakers are also looking to hike interest rates sooner rather than later.

Although BOE Governor Carney and his men decided to keep monetary policy unchanged in their June rate statement, the minutes of their meeting revealed that central bank officials are confident that the U.K. economy can sustain its pace of growth. “Slack would be absorbed more quickly than had previously been expected,” the press release showed.

On top of that, the minutes also showed that policymakers were somewhat surprised to find out that markets have been attaching a very low probability to an actual interest rate hike this year. Note to self: Take Governor Carney’s hints more seriously!

Recall that BOE Governor Carney has already dropped a couple of bombshells when it comes to rate hikes. Earlier this year, he projected that the U.K. central bank would be ready to hike before the general elections take place in 2015. A few days back, he surprised the markets again in saying that rates might rise earlier than initially anticipated during one of his speeches.

Carney noted that rising house prices is putting an upward pressure on overall inflation, and that further gains in the CPI might warrant tighter monetary policy. BOE policymakers supported this view, as the minutes showed that the precise timing of the rate hike might be dependent on inflation.

There’s no denying that signs of improvement can be seen all over the U.K. economy, but the board remained divided when it comes to the pace and timing of monetary policy tightening. It was suggested that a more gradual approach could be taken, which might then allow the BOE to start hiking earlier.

“The case for raising the bank rate gradually and cautiously was reinforced by uncertainty over its likely impact on the economy, following the long period at 0.5 percent, although it could be argued that the more gradual the intended rise, the earlier it might be necessary to start tightening policy,” according to the BOE MPC minutes. “If policy were tightened prematurely however, that could be associated with considerable costs in terms of lost output.”

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