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Will It Be 'One And Done' For Interest Rate Rises?

Markets are expecting interest rates to rise to 0.5% tomorrow, but longer term monetary policy is what's really going to matter. Here's what the experts predict

David Brenchley 1 November, 2017 | 4:08PM

Bank of England governor Mark Carney is expected to raise interest rates tomorrow.

Expectations are that the Bank of England will raise interest rates for the first time in more than a decade when the its Monetary Policy Committee meets at around midday tomorrow.

No one will be surprised when that happens – indeed, markets have been pricing such an event in ever since Bank Governor Mark Carney first suggested this would be the case and there’s now a 90% probability it will happen.

That’s led many, including Andrew Herberts at Thomas Miller Investments, to claim that should the Bank not act, its credibility with investors would potentially be undermined.

The next question for investors and commentators is what the course for monetary policy will be in the future.

Previously, markets had been pricing in a second hike in mid 2018. That has since become less likely and analysts at Bank of America Merrill Lynch reckon “this will be ‘one and done’ from the Bank, even if they do not describe it that way”.

Others disagree. M&G’s Richard Woolnough asserts that the reason rates have not gone up for so long is because of worries that the world economy was weak.

With data surfacing recently suggesting the opposite is the case, Woolnough thinks the Bank should follow the US Federal Reserve’s example and raise rates. “I think that they should just look at the data in front of them and realise that maybe things aren’t as bad as they think they are.”

Ben Lord, manager of the M&G UK Inflation Linked Corporate Bond fund, is somewhere in the middle. He says that just hiking once “doesn’t communicate any particularly good message, it doesn’t achieve anything sustainable”.

Lord hopes Carney stresses upon bond markets that he’s going to hike more than once and he sees one more next year. “But I don’t think that the economy is going to be strong enough for this to be the beginning of a long and sustained upward period of interest rate hikes,” he adds.

If there is a more hawkish tone to Carney’s speech, Lord precicts there could be some “decent moves” in the bond market, given that some of the market has priced out some of that.

Further rate rises would be positive for sterling and negative for UK gilts, explains Andrew Harman, multi asset portfolio manager at First State Investments.

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Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
M&G UK Inflation Lnkd Corp Bd GBP R Acc113.54 GBP0.18
About Author David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk