The Bank of England has sent a reassuring message to businesses and households that interest rates are to remain at their record low well into next year as it cut its forecast for near-term inflation.
The central bank signalled in its latest Inflation Report that interest rates would need to rise at some point from the current 0.5%, but it gave no indication that a move was imminent and reiterated that when borrowing costs do go up, they will do so gradually.
Rates have been at 0.5% since the depths of the global financial crisis more than six years ago. Minutes from the Bank’s latest rate-setting meeting, published alongside the report, showed that only one of the nine members of the monetary policy committee felt it was now time to start increasing rates. Ian McCafferty dissented from the rest of the MPC, as he has done in recent months, based on risks that inflation would start to pick up.
The Bank’s quarterly outlook said that based on recent falls in oil and other commodity prices, “inflation is likely to remain lower than previously expected until late 2017” and return to the government target of 2% in about two years’ time, then rise above it. The latest official figures put inflation at -0.1%.
The report also flagged a weaker outlook for global growth than at the time of its last forecasts in August, with the MPC on Thursday downgrading the prospects for emerging market economies. Such an outlook would continue to influence the UK economy and the path of interest rates.
“All members agree that, given the likely persistence of the headwinds weighing on the economy, when Bank rate does begin to rise, it is expected to do so more gradually and to a lower level than in recent cycles. This guidance is an expectation, not a promise,” the inflation report said.
Policymakers were more upbeat about the UK domestic outlook.
“Domestic momentum remains resilient. Consumer confidence is firm, real income growth this year is expected to be the strongest since the crisis, and investment intentions remain robust,” the report said.
The Bank played down worries the UK economy had stepped down a gear after the latest official figures showed GDP growth slowed in the third quarter.
“Although it has moderated, growth is projected to pick up a little towards the middle of next year, as a tighter labour market and stronger productivity support real incomes and consumption, and as accommodative credit conditions encourage strong investment and a pickup in the housing market,” the report said.
On the back of a low oil price and cheap imported goods the Bank forecasts inflation will remain close to zero for the rest of this year and although it will start rising around the turn of the year it will probably stay below 1% until the second half of 2016.
Inflation is forecast to rise gradually from the start of 2016 and then reach the Bank’s target of 2% in about two years and then rise above it. That is based on interest rates following the path expected by the City, with a first increase to 0.75% in the first half of 2017.
In an open letter to George Osborne, explaining why inflation was so far off target, the Bank’s governor, Mark Carney, pointed to lower commodity prices, a stronger pound – which makes imports cheaper – and soft wage growth.
The majority of economists in a Reuters poll had forecast that only McCafferty would vote for a rise this month, having done so for the previous three months. But some economists had predicted at least one other policymaker would join him in voting for a hike given some of their recent comments as well as signs from the US central bank that it could raise rates there in December.
This article was written by Katie Allen, for theguardian.com on Thursday 5th November 2015 12.18 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010