Interest rates ‘likely to rise in May’ despite Brexit

A majority of economists still expect UK interest rates to rise in May even though Brexit is making the future hard to predict.

Last month, the Bank of England’s rate-setting monetary policy committee (MPC) voted unanimously to leave rates at 0.5%, but “the tone of its discussion suggests the cost of borrowing will not remain this low for much longer”, says The Guardian.

The Bank is intent on bringing the UK’s 3% inflation rate down below its target of 2%, and is expected to increase the base rate to 0.75% by the summer.

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Following last month’s meeting, MPC member Gertjan Vlieghe said a pick-up in wages and an increase in household debt meant the economy was “ready for somewhat higher interest rates”.

The Bank said in February it would need to raise rates to tackle stubbornly high inflation “somewhat earlier and by a somewhat greater extent” than it had anticipated towards the end of last year and its governor, Mark Carney, has hinted there will be at least two further rate rises over the next three years.

A majority of experts polled by Reuters still think a summer rate rise is likely after the hawkish signals from Bank of England policy makers, “but most don’t see a follow-up move for another year”, says the news agency.

“Part of the hesitation,” says Reuters, “stems from the fact that Britain’s economy has moved from leading to lagging all of its industrialised peers, and is facing its most far-reaching change since the Second World War: leaving the European Union.”

All but one of those polled believed the UK will strike some sort of transition deal with the EU to soften the blow of Brexit.

But while the consensus is that London and Brussels will eventually agree a free trade deal, the second most likely outcome according to the experts is a no deal scenario, meaning Britain would trade with the EU on punishing World Trade Organisation rules.