City waits for Bank of England to signal earlier rate rise

Financial markets are braced today for a steer from the Bank of England that the central bank will tighten monetary policy sooner than it previously expected.

This morning Governor Mark Carney will unveil the Bank's quarterly Inflation Report, which is expected to highlight market expectations of a shift forward in the expected date for a rise in the Bank rate.

In February the Bank noted markets were pricing in a rate rise in the second quarter of 2015, around the time of the general election. Some members of the Monetary Policy Committee subsequently described this market expectation as "not unreasonable".

"We expect the BoE to tacitly accept that the first hike will come in Q1 2015 instead of the Q2 date they had planned on three months ago" said Rob Wood, the chief economist of Berenberg Bank

Sterling eased yesterday against the dollar to $1.68 as dealers took risk off the table ahead of today's report. However, the FTSE 100 was more robust, ending at its highest level since 2000.

The latest job market figures for the quarter up to March are also due out this morning, with the consensus expecting another decline in the jobless rate, taking it to 6.8 per cent. A further decline will increase the clamour to raise rates from their present record lows of 0.5 per cent in order to defuse a potential inflationary threat.

The Bank has said that the timing of the first rate rise will depend on its estimate of the level of spare capacity in the jobs market, gauged from various measures such as underemployment and hours worked. In February the Bank said the degree of slack was between 1 and 1.5 per cent of GDP and that it would begin to raise rates before this was fully used up. Analysts are expecting the Bank to revise down that size of that gap today.

Expectations of an earlier rate rise have risen as the economy has continued to grow strongly. This week the CBI became the latest body to bring forward its forecast for the rise to the first quarter of 2015. The economy grew by 0.8 per cent in the first quarter and it is widely expected to surpass its pre-crisis peak in the second quarter.

Analysts are also anticipating a move from Threadneedle Street to curb excesses in the housing market. A poll of property analysts by Reuters yesterday found the majority expect the Bank to instruct banks to hold more capital against certain types of mortgage next month. However, the polled analysts also said this action would not prevent house prices rising by 8 per cent this year. Property prices were up 9.1 per cent in the year to February, according to the latest official figures.