Will the Bank of England ever increase rates?

Will the Bank of England ever increase rates?

7 October 2015, 20:01
Angeliqi N
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Tomorrow, on Thursday, Bank of England Governor Mark Carney and his colleagues will release their assessment of the shrinking U.K. economy together with the latest policy decision.

Fresh data released earlier this week showed that services grew at the weakest pace in more than two years, signaling a slowing economy that underlines the case for holding the key rate at a record low.

Since the bank's September policy meeting, the sluggish expansion and the U.S. central bank's decision to postpone hiking rates prompted Bank of America Merrill Lynch, JPMorgan Chase and Royal Bank of Scotland to lower their BOE forecasts. The weaker outlook also raises the question of when inflation will be high enough to guarantee a rate lift-off. While Carney has insisted the decision will come in to focus at the turn of the year, consumer-price gains have lagged the central bank’s 2 percent target for 20 months and the most recent data indicated a rate of zero, which means his tone next time should be less hawkish.

Moreover, minutes of the U.S. Monetary Policy Committee’s October meeting will be closely monitored for any change in language on the global environment. Last month’s said that while the central outlook hadn’t changed materially, the risks warranted scrutinizing for any impact on domestic economic activity.

The U.S. data has softened, there’s been no real change in Chinese data, from a very broad view there are further signs of stress in emerging markets.


Most analysts forecast that officials will leave the rates unchanged at 0.5 percent.

Rob Wood, an economist at Bank of America in London and a former BOE official, for instance, predicts an increase of 25 basis points in May next year, compared with February before. Investors see it happening even later than that. For instance, Sonia forward contracts don’t fully price in an increase until after November 2016.

The International Monetary Fund on Tuesday raised its 2015 U.K. growth forecast to 2.5 percent from 2.4 percent. It cut its global numbers to 3.1 percent from 3.3 percent.

So far, one MPC member has suggested that emerging cost pressures justify an immediate tightening. Ian McCafferty has been alone in voting for a quarter-point rate increase in the last two months.

A pickup in pay is driving consumers’ spending power and helping the push for higher rates. Wages rose an annual 2.9 percent in the three months through July - the fastest pace in more than six years. Meanwhile, the country's labor market remains robust, with the jobless rate down to a pre-crisis level of 5.5 percent. And core inflation, excluding volatile components such as food and energy, was 1 percent in August.

However, none of this is sufficient to overcome the challenge of raising rates while there’s no inflation, and thus do not expect raising rates in the nearest term.