By Jemima Kelly
LONDON (Reuters) – Barclays (LON:BARC) and HSBC have become the first of Britain’s “Big Four” banks to forecast higher UK interest rates over the coming year, following the Bank of England’s warning last week that rates were likely to rise “in coming months”.
HSBC said on Monday it expected the central bank to raise rates by 25 basis points in November and by a similar amount in May 2018, having previously seen rates staying at their record lows until the end of 2018.
Barclays had said on Friday it expected the BoE to hike by 25 bps in November, having previously also forecast no change.
The two rate increases predicted by HSBC would take Britain’s benchmark interest rate to 0.75 percent by mid-2018.
The BoE said after last week’s policy meeting that it was likely to raise rates in coming months if the economy and price pressures kept growing. It would be the first hike in UK rates in a decade.
The following day, policymaker Gertjan Vlieghe largely echoed that message in a move seen as significant because he has been regarded as one of the most dovish members of the rate-setting monetary policy committee.
“The Bank of England’s MPC minutes in September were hawkish, but the subsequent comments from former doves Mark Carney and Jan Vlieghe appear to have sealed the deal,” wrote HBSC economist Elizabeth Martins in a note to clients.
Bank of England Governor Carney said on Monday that Brexit was likely to push up Britain’s inflation rate and reiterated the central bank’s new view that interest rates are likely to rise in the coming months.
As a result of its new BoE forecasts as well as other “cyclical forces”, HSBC said it was revising its year-end sterling forecast by a full 15 cents to $1.35 .
It also said it no longer saw the euro reaching parity with the pound, which it had previously expected to happen by year-end. It now sees sterling at 89 pence per euro by the end of 2017 (EURGBP=D3), and at 95 pence by end-2018.
“The Bank of England’s unexpected hunger to join other G10 central banks in the race to the exit from accommodative monetary policy has given additional impetus to sterling, a currency that has happily ignored the political intrigue of Brexit throughout 2017,” wrote HSBC’s global head of currency research, David Bloom.
Explaining their change of view on Friday, Barclays’ economic research team said in a note that it did not reflect a more optimistic view of Britain’s economic outlook.
“Importantly, this change is not based on a change in our macro forecast: ‘no-change’ remains the only policy action consistent with our growth and inflation outlook,” they wrote.
“Rather, we believe the MPC is ready to take the risk of a hike even faced with disappointing data as it has boxed itself into a corner.”
They added that Barclays expected only one rate rise and that economic data would deter the BoE from any further hikes.
Not all banks envisaged steeper borrowing costs soon.
Ross Walker, head of European economics at NatWest Markets, said that while the balance of risks had shifted to an “early hike” in either November or next February, it was not clear rates would rise in November.
“We have not formally changed our BoE Bank Rate forecast (no hikes in 2017 or 2018), but we will review the forecast in the light of incoming data,” Walker said.
A spokesman for Lloyds Banking Group (LON:LLOY) said its economics team should update its view on interest rates in the next few days.
Sterling recorded its strongest week in more than eight years last week, with an almost 3 percent climb against the dollar to above $1.36, after the BoE said rates were likely to rise in the “coming months”.
The BoE’s next announcement on monetary policy is scheduled for Nov. 2.
BANK OF ENGLAND BASE RATE (EP) : United Kingdom http://reut.rs/2jABSqR