The analyst noted that alongside the US, the UK economy has the “most room for higher rates” if the bank were to significantly ease off its long-term cautious post-credit crunch stance.
However, Oxford Economics does not expect a radical policy rule shift soon but factors such as the strength of the global economy would warrant central bank thinking to shift in this direction.
The briefing said: “Central banks have been cautious about raising rates over the last few years, keeping them below levels that ‘standard’ policy rules would imply”
It continued: “Among the major central banks outside the US we see the biggest scope for higher interest rates from moving back to more ‘standard rules’ in the UK.
“There, such a shift would imply Bank Rate above 2% (rather than the current 0.5%). The least room is in the Eurozone.”
No radical policy shifts expected
However, it highlighted that it did not see radical policy shifts in its baseline forecast, but there were some reasons for central bank thinking to shift back in a more ‘standard’ direction.
These reasons included:
- the big improvement in world growth since mid-2017,
- loose overall financial conditions,
- and survey analysis suggesting the risks of inflation undershooting targets is waning while the risk of inflation overshooting targets is on the up.
Oxford Economics concluded that central bank thinking does look to be shifting in response to changing global conditions and a shifting balance of inflation and deflation risks.
It said this change in mood has been hinted at in some recent comments by officials in the UK.
“It is also reflected in our new interest rate forecasts for the US and UK – we now see four US Fed hikes of 25 basis points this year (from three previously) and two in the UK (50 basis points more than a month ago),” it added.