Goldman Sees the Power of BOE Tightening Increasing Through 2018

(Bloomberg) -- Bank of England interest-rate increases could have a more powerful economic effect in 2018 as the U.K. gets a boost from global growth, according to Goldman Sachs.

Surprise changes in BOE policy have a bigger impact in expansions than in recessions, economists Lasse Holboell Nielsen and Adrian Paul found. At the peak of the business cycle, an unexpected 10 basis-point increase in rates reduces the level of U.K. gross domestic product by about 0.4 percent after two years, and inflation by around 0.1 percent, while at the trough a similar move has a negligible effect on both measures, they said.

“If -- as the MPC now expects -- the U.K. economy is poised to recouple with an intensifying global expansion, BOE policy tightening will become increasingly influential through the course of 2018,” the economists wrote.

The report measured policy surprise based on the move in two-year swap rates within a one-hour window of BOE events including decisions, press conferences and speeches. They noted that swap rates rose on Feb. 8, when the BOE said interest rates may need to increase faster than previously expected.

The findings indicate Governor Mark Carney will want to tread carefully when communicating the BOE’s next steps in order to limit the risk of a surprise cramping growth. He is set to testify before lawmakers in London on Feb. 21 on the BOE’s latest Inflation Report.

©2018 Bloomberg L.P.