While there is virtually no chance of a surprise announcement of a rise, any hints that the hawk’s voices are getting louder or more numerous could hit UK equities.
The two most hawkish members of the committee are generally accepted to be Martin Weale and Ian McCafferty.
Christine Johnson, head of fixed income at Old Mutual Global Investors, said she believes it is now ‘highly likely’ that at least one and possibly two members will vote this week to raise interest rates.
In Johnson’s view however, ‘there is still quite a lot of road to travel’ before the minority becomes a majority and a rate hike is sanctioned.
The picture remains complicated in identifying the exact speed that the UK economy moving.
Higher GDP, consumer spending and earnings growth all support rate increases, Johnson noted.
But other indicators such as unemployment, the strong pound and higher productivity suggest rate setters could stick with the ‘lower for longer’ policy.
“While most members are unlikely to countenance tightening policy while the economy flirts with deflation, the Bank of England’s job is to look ahead,” Johnson said.
“Doing so in a consistent manner is something the Governor, Mark Carney, has wrestled with in the past. To be consistent now, the Inflation Report should set the scene for a recovery in inflation and a rate rise in early 2016.”
“We’re happy to be underweight UK duration to position for this, even as the current evidence is fairly equally weighted,” Johnson continued. “Still, a ‘downside surprise’ such as a sudden lurch back into recession seems less likely. And as we’ve already seen a collapse in inflation, the balance of probabilities sits with a progressively more hawkish MPC.”
