UBS Predicts U.K. Rate Hike in May If Brexit Transition Agreed

Updated on
  • U.K. economic growth forecast for 2018 also upgraded
  • Bloomberg Economics has changed its call, sees August move

UBS AG brought forward its forecast for the next U.K. interest-rate increase, though it also sounded a warning bell about such a move.

Bank of England policy makers will raise their benchmark by 25 points at their May meeting, strategist John Wraith wrote in a report dated Jan. 31. In forecasts published after the BOE’s November rate hike, UBS had predicted no further increases through 2019. Its new prediction is “explicitly conditional” on the British government and the European Union reaching an agreement on a transitional deal by the time of the EU Council Summit in late March.

“To be clear, while we are now revising our forecast to incorporate another rate hike we did not previously anticipate, we continue to believe the MPC took a risk with the U.K. economy by raising rates in November, and would be compounding this by doing so again in May.”

Investors have also been increasing bets on a U.K. interest-rate increases as soon as May on the back of some solid economic data recently.

May Day?

Traders see a rising chance of a BOE rate hike in the first half on 2018

Source: Bloomberg

At Bloomberg Economics, economists this week also brought forward their prediction for the timing of the next BOE rate hike to August, and noted that even a move in May “can’t be ruled out.” They raised their forecasts for 2018 GDP growth -- lifting it to 1.7 percent from 1.4 percent previously.

Read more: Stronger economy will prompt BOE summer rate hike

Wraith also revised his growth outlook for the U.K. He now sees the economy expanding 1.4 percent this year and 1.2 percent in 2019, from 1.1 percent in both years previously.

“The timing and extent of this potential slowing of GDP over the coming quarters is particularly difficult to forecast as it will clearly be dictated to a large extent by the ongoing Brexit negotiations.”

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