A slew of recent economic data have suggested the British economy is finally perking up. That did not cause the Monetary Policy Committee to raise official UK rates yesterday, but it does mean we are seeing headlines like this in today's press: Data bolster belief that next UK rates move is up, by Jamie Chisholm in the Financial Times.
Expectations of an interest rate increase later this year hardened on Thursday after data showed an acceleration in economic activity that might prompt the Bank of England to apply a cautionary touch on the brakes.
Although the Bank’s monetary policy committee said on Thursday it would leave its main interest rate unchanged at 4.5 per cent for the ninth consecutive month, robust surveys on manufacturing, the service sector and the housing market led money markets to price in a quarter point hike before December, with the possibility of more to follow.
And City expects rate rise this year, by Larry Elliott in The Guardian
The City was last night betting on at least one increase in interest rates before the end of the year after a strong performance by the service sector raised the prospect of anti-inflationary action from the Bank of England.
Despite leaving the cost of borrowing unchanged for the ninth successive month, the best performance by the service sector in more than two years prompted speculation that the monetary policy committee would soon be forced to raise rates. Money markets were signalling rates of between 4.75% and 5% by the end of 2006 compared with the current level of 4.5%. Upbeat economic data this month, culminating in yesterday's survey of the service sector from the Chartered Institute of Purchasing and Supply, prompted analysts to suggest there was an increased chance of tightening of policy.
I agree with these assessments, though expect to see the first 25 bp rate hike sooner than the market expects. This follows recent rate hikes in the United States, Australia and Canada. New Zealand aside, there is little sign yet that interest rates in the anglo-saxon economies have peaked.