Bank of England warns Greek debt crisis could delay interest rate rise

Mark Carney

Bank of England policymakers are concerned that backsliding in talks to resolve the Greek debt crisis could delay Britain’s first interest rate rise in eight years, but admitted that the prospect of a hike is increasing as the UK economy strengthens.

With Brussels and Athens yet to begin formal talks on a third bailout deal, the monetary policy committee (MPC) said the eurozone could falter in the event of renewed infighting between Greece and its creditors.

Uncertainty about the prospects for wage growth also held back the MPC from bringing forward a rates rise, according to minutes of its meeting this month. Instead, the MPC voted unanimously to maintain the base rate at 0.5%.

The minutes said: “For all MPC members, the policy decision this month was clear cut.” For a number of policymakers, however, it was the threat posed by rising wages on the Bank’s inflation target of 2% and not just the “very material factor” of Greece’s debt standoff that influenced their vote to keep rates on hold. “Absent that uncertainty, the decision between holding Bank rate at its current level versus a small increase was becoming more finely balanced,” the minutes said.

The Bank of England governor, Mark Carney, argued last week that Britain would need to start raising interest rates to cool economic growth and prevent inflation heading above the 2% target.

He said a rise in rates could come before Christmas if the trend for higher wages put pressure on prices after a period of zero inflation.

The prospect of interest rates moving higher sent the pound up half a cent against the dollar to $1.56, while against the euro it gained 0.6% to €1.43, recovering most of the losses from earlier in the week.

Chris Williamson, chief economist at financial data provide Markit, said Carney’s speech had already frightened growing numbers of consumers into believing they faced the prospect of higher inflation and an increase in mortgage costs by the spring of next year at the latest.

Citing Markit’s latest household finance index, which is based on a survey of 15,000 households, he said: “Households have already started to adjust to the reality of rate hikes drawing nearer, mentally at least. The survey showed one in three households expect the Bank to starting hiking in the next six months picked up to 34%, up from one in four in June.”

The Bank’s chief economist, Andy Haldane, has voiced concern that a rate rise risks undermining the UK’s recovery when households also face a squeeze from higher prices.

Wages increased by 3.2% in May while inflation was virtually flat, providing workers with the highest average wage increase since the financial crisis. But the central bank expects inflation to increase over the coming months and voiced concerns that the momentum would be maintained over the coming months, which increases the prospect of a rate hike.

But Haldane appears to be a lone voice after another dove David Miles ditched his long held resistance to higher rates in a speech where he argued it would be a “bad mistake” to delay for much longer.

Some City analysts supported the view that a squeeze on manufacturers from the high pound and the UK’s weak recovery meant a rate hike still looks a long way off.

Martin Back, UK economist at the EY Item Club, said: “Recent falls in the price of oil and energy could contribute to inflation falling into negative territory in the next few months.

“Moreover, were the UK to be the first major economy to undertake rate ‘lift-off’, the already sizeable upward pressure on sterling could accelerate significantly, hitting exporters and undermining the prospect of inflation returning to the 2% target,.”

Wednesday’s release of the minutes was the last that BoE will make separately to the announcement of its interest rate decisions. Starting with its rates announcement on 6 August, minutes will be published at the same time as policy decisions.

Powered by Guardian.co.ukThis article was written by Phillip Inman Economics correspondent, for theguardian.com on Wednesday 22nd July 2015 12.41 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010

 

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