Markets take rate hike in their stride

The MPC succeeded in striking a dovish tone as it raised Bank Rate for the first time in a decade. While the Committee didn’t frame the hike as “one and done”, it did convince investors not to expect a further increase until early 2019. We agree that there will be some pause before the next hike in rates. But we still expect the next increase to come far sooner than markets expect, probably in the second quarter of next year. After all, once worries about the effects of the first hike have eased, the MPC will feel more confident to press ahead with further rises when the data warrant it. And we remain optimistic about the prospect for a slight pick-up in growth next year, to above the MPC’s estimate of the economy’s “speed limit”. That said, given that we think that markets are also underestimating the speed with which US rates will rise, we doubt that sterling will make much headway against the US dollar in 2018. On the other hand, the pound might appreciate more against the euro, given that the ECB is probably still a long way off raising rates.