Interest rates on the up, says Skandia Investment Group

The Bank of England could raise interest rates as early as next week, according to Rupert Watson, head of asset allocation, Skandia Investment Group (SIG).

However, Watson believes the rise will more likely occur in May and will be followed by a series of hikes that will result in interest rates hitting 2-3% by the end of next year. In recent weeks, Watson thought that interest rates would stay on hold until the end of this year or early next year, but says recent data and the hawkish minutes at the most recent Bank of England meeting has caused him to change his mind.

Commenting, Watson said:

“UK rates have been at 0.5% for almost two years – the lowest rate in history by a long distance – and UK inflation has been above target for over a year. UK growth was strong in the middle of last year, but weakened a little into year-end. Although the Bank expects inflation to fall back to target next year, some on the Monetary Policy Committee are worried that rising inflation expectations may lead to a more sustained rise.

“Recent data (in particular the recent PMIs) suggests that there has not been a significant slowing in the economy. Meanwhile the global economy is strengthening and the risks from Europe diminishing. The question MPC members will be asking themselves is ‘do interest rates still need to be at the lowest level ever?’.

“Given what has happened over the past few weeks, there is a real chance interest rates will rise next week – 10 February. My guess is that the MPC will hold fire until the following inflation report meeting in May. Thereafter, they might raise rates by 0.25-0.5% per quarter taking rates to well over 2% (possibly over 3%) by the end of 2012.”