When will the Bank of England raise interest rates? Analysts are starting to hone in two dates with the favoured being towards the end of 2016.

Two analysts representing polar opposite views of when the Bank of England is likely to make a rate hike have softened their stances, narrowing the possible range when the bank might opt to raise rates.

The previously wide spectrum boasted the earliest expectations in May this year and latest in Feb 2017.

However, since then the range has arguably narrowed to between June and November, or so we believe.

Doves Home In

The views of Associated Foreign Exchange’s (AFEX) Lucy Lillicrap represent those at the dovish end of the spectrum.

They also fall in line with those of the range indicated by the pricing of money market instruments, such as 2-year interest rate swap futures, which enable investors to transfer a loan from a floating to a fixed rate of interest, and therefore gauge the chances of a rise.

Previously she had stuck to her forecast of early-2017 date for a hike, even in the face of excellent jobs data for November 2015, mainly due to the persistence of stubbornly low inflation:

“When deciding the course of UK interest rates the MPC’s primary target is to maintain inflation at 2% 2 years out which last month’s inflation report suggested was still some way off.

All in all, while the employment survey was positive news it will probably not be enough on its own to change the current thinking at the MPC on when to raise rates, with the markets still not fully pricing in the first UK rate rise until early 2017.”

Lillicrap, now appears to have softened her stance, however, commenting yesterday that basing predictions on money market rates – which still forecast a hike in early 2017- has the drawback that they can change very rapidly due to new incoming information, and are therefore a fickle barometer:

“At the moment the futures market is still not fully pricing in a rate hike in the UK until early 2017 but historically has been very quick to change the pricing depending on the data being released.”

She further concedes some strength in recent data:

“Some of the recent data has been mildly positive (average earnings wage growth at 2.5% in December is a healthy number and the UK’s unemployment rate is 5.4%, the lowest since the second quarter of 2008) which is why we are now seeing the hawks become more vocal. “

In a more direct indication her stance may have shifted, the analyst added that according to the IMF only two countries warranted raising interest rates in 2016, and they were the U.S and the U.K.

She adds:

“As the deflationary effects of the lower oil price continue to diminish and with unemployment falling and wages rising, albeit slowly, inflation should start to creep higher.

When combined with the Fed raising rates in December and the UK and US economies being in similar stages of economic recovery the hawks may have a point. “

However, she adds that core inflation was still at 1.2% in December, which was “hardly roaring inflation” and remains an obstacle.

May Hawks Demure

At the other end of the spectrum we have economist Daniel Vernazza at UniCredit, who has repeatedly called a first hike in May 2016.

Vernazza stuck stubbornly to his prediction, despite poor November PMI’s, arguing they did not diminish his view that the U.K economy now lacked virtually any spare capacity, and that core inflation remained on target, commenting on the minutes of the December meeting, he said:

“Overall the MPC did not say anything to change the market’s expectation that the first rate hike will come in the second half of next year, although we continue to expect the first hike in May as spare capacity in the UK economy is close to zero.”

After sterling continued to weaken on Brexit fears going into 2016, however, Vernazza softened his stance somewhat, sticking to his call for a May hike but adding the proviso that slowing growth was skewing risks further towards a delay:

“However, for a while now our forecast for the first hike in May has not been a conviction call, increasingly we’ve had to emphasize the risks that they delay further.

That’s because the economy is slowing (actually it’s been slowing in line with our GDP forecasts set two years ago) and we expect GDP growth to slow further to 1.9% this year (consensus 2.4%) and for the balance of growth to be increasingly lopsided towards services and household consumption. “

More importantly he saw the possibility of the BOE completely side-stepping a hike and using macroprudential instruments instead:

“it looks increasingly likely that the BoE will try to use its new macroprudential toolkit as the first line of defence against risks to financial stability, in an attempt to keep interest rates lower for longer.”

According to Vernazza, this might provide the solution to the paradox of “faster credit growth” in a slowing economy:

“As I’m sure you know, consumer credit growth is running at 8.3% yoy, and rising.”

New Range From June to November

With a May hike looking increasingly less likely even to hawks, it makes the next possible date June, which would have the advantage that the BOE would be able to digest the actions of both the Fed and the ECB before making their own decision, as both have meetings before the BOE in the month of June.

The Fed may also decide to “front-load” their rate hiking before the middle of the year, at which point the increasing strength of the dollar could start to act as an offsetting factor on inflation, and lead to a more dovish retrenchment in policy.

In this scenario the diverging spread between the Fed and the BOE rates might get so stretched it could make the BOE take action in June – just to ensure price stability.

Such a divergence in policy and rates would be a major negative risk factor for cable going forward.

Significantly weaker cable by the middle of the year, however, could promote higher U.K inflation, further increasing chances of a hike.

November a Favourite

As far as the rest of the year goes, a July hike is marginally less likely as there is not Fed meeting in that month.

August is unlikely because the MPC probably wouldn't make a move in the summer holidays.

September is less likely as the Fed have their FOMC after the BOE, and the BOE might want to see what the Fed are doing first.

There is no FOMC in October, leaving the November 3rd BOE meeting as a possibility at the dovish end of the spectrum, given the FOMC have a meeting on the day before.

In addition, in November the BOE will have Q2 GDP data at hand, and the latest quarterly inflation report, and if there is a referendum it on E.U membership it may have been held, so they will have considerable amount of data on which to base their decision.