The Bank of England is likely to raise interest rates twice this year and twice in 2019, despite a sluggish economy, says a forecasting body. Bank governor Mark Carney has said a rate rise is “likely” this year, but any increases will be gradual.
However, the EY Item Club said a tight labor market and firming earnings growth were likely to fuel hawkish instincts at the Bank. The forecaster predicted GDP growth of 1.6% this year and 1.7% in 2019.
It said the expected rate rises would allow the Bank to gradually but steadily normalize monetary policy.
UK interest rates currently stand at 0.5%. Many economists and investors in the markets believe that the Bank's Monetary Policy Committee (MPC) will vote for a 0.25% rate rise at its May meeting.
Howard Archer, chief economic adviser to the EY Item Club, said there was a risk that two rate hikes this year would exert unnecessary pressure on consumers. However, he added that the growth of fixed-rate mortgages meant that fewer homeowners would be affected by a rate rise.
In addition, the burden of interest payments to the average household was at a record low at the end of 2017, and so consumers are in a relatively healthy position to cope with dearer money, he said.
Mr Archer said the UK economy was chugging along at a fairly steady but uninspiring rate, with inflation continuing to fall and a tight jobs market expected to deliver some uptick in pay growth.
At the same time, separate research by Deloitte showed an improvement in UK consumer confidence, but said this had yet to translate into an overall increase in spending.
Deloitte's latest quarterly Consumer Tracker survey said UK consumers were feeling more upbeat about their personal finances. However, people were still prioritizing essential spending over luxuries, with the retail and casual dining sectors facing unprecedented challenges.