Bank to tighten money supply
Four interest rate rises ahead, says EY
Dearer money is predicted over the next two years
An influential forecasting group believes the Bank of England will raise interest rates four times in the next two years.
The EY Item Club says the combination of a tight labour market and firming earnings growth are likely to fuel the hawkish instincts of the Monetary Policy Committee (MPC) and result in two interest rate rises in 2018.
It is also now forecasting two additional rate hikes in 2019 as the Bank of England looks to gradually but steadily normalise monetary policy.
The predictions are in spite of the UK economy continuing to display a lack of momentum and showing little sign of breaking the pattern of uninspiring growth seen in 2017.
The Bank of England governor Mark Carney also stated last week that the first of these rises may not come next month as widely expected. His comments, prompted by the sharp fall in inflation and weak retail figures, caused the pound to slip.
EY’s Spring Forecast expects UK GDP to grow by 1.6% in 2018 (a modest downgrade from 1.7% in the EY ITEM Club’s Winter Forecast), and then by 1.7% in 2019 (unchanged).
Howard Archer, chief economic adviser to the Club said: “Raising interest rates this year is not an open and shut case for the MPC.
“With inflation heading down and the Bank of England’s view of the supply-side of the economy arguably too pessimistic, two rate hikes this year risk exerting unnecessary pressure on consumers.
“However, the impact on growth from higher interest rates should be limited by the proportion of households with a mortgage, which currently lie at their lowest levels.
“There has also been a shift from variable-rate to fixed-rate mortgages in recent years. In addition, the burden of interest payments to the average household was at a record low at the end of 2017, and so consumers are in a relatively healthy position to cope with dearer money.”