The Bank of England has sent a reassuring message to businesses and households that interest rates are to remain at their record low of 0.5% for a while as it lowered its forecast for near-term inflation.
The Bank’s monetary policy committee left monetary policy unchanged, as expected, at its monthly meeting, but the surprise was that no one joined Ian McCafferty in voting for an immediate quarter-point rise.
Here are some City economists’ thoughts on when the first rate increase will come.
Vicky Redwood, chief UK economist at Capital Economics
The Super Thursday announcements from the MPC are on the whole quite dovish ...
At the same, though, the MPC has sent a warning to markets that they have lowered their rate expectations too far. The Inflation Report forecasts are based on rate expectations in the 15 working days to 28 October – which at that time were for the first rate rise to come in Q2 2017. And they show inflation projected to be a bit above the 2% target at the policy horizon.
Admittedly, market expectations have corrected a bit in the past few days (with the first hike now expected at the end of 2016). But we think that this process has further to go. Indeed, as a result of all today’s announcements, we are comfortable with our view that rates will rise in Q2 next year (and subsequently increase very slowly).”
James Knightley, UK economist at ING
This clear dovish shift in the BoE’s thinking seems a little odd in an environment where the growth numbers are looking pretty good and where service sector inflation is pushing higher (currently 2.5% year on year). Even if energy prices stay flat, we should be looking at headline inflation above 1% in early 2016.
Furthermore, next week’s labour report is expected to post another decent jobs gain and wage growth figure. Still, the BoE’s assessment has diminished the prospect of a near-term Q1 2016 hike, but we remain comfortable with our view that they will start tightening in Q2 2016 – after the Federal Reserve, but well ahead of market expectations. Interestingly we also got some forward guidance on when the £375bn QE programme will start to be unwound – only when bank rate approaches 2%, which is at least two years away.”
Ross Walker, senior UK economist at Royal Bank of Scotland
The RBS forecast remains for the first bank rate hike to come in August 2016. Whilst a US Fed hike in December 2015 could reignite expectations of a BoE move in February 2016, we are at the margin more comfortable with our relatively dovish forecast versus the City economists.”
Peter Cameron, associate fund manager, EdenTree Investment Management
No fireworks from the Bank of England today, with just the one MPC member calling for a rate rise. Wage growth may be relatively robust but inflation has dipped back into negative territory and the growth outlook remains uncertain following a volatile summer. With half the world’s central banks cutting rates or planning to expand their own QE programmes, the Bank of England will be worried that hiking now could push up sterling and trigger further deflationary pressures. Therefore the record-low 0.5% base rate may well be celebrating its seventh birthday in March.”
Samuel Tombs, chief UK economist, Pantheon Macroeconomics
Today’s Super Thursday releases from the UK MPC sound dovish, but they still leave the door open to a rate increase in about six months’ time. The committee lowered its central forecast for CPI inflation over the next 18 months. But this mainly reflects different assumptions for the impact of lower import prices, which the committee has said it will look through.
At the two-year horizon, it still expects inflation to be slightly above its target, and to rise further thereafter. Since this projection assumes that bank rate follows the path implied by market interest rates, the MPC appears to anticipate tightening policy earlier than Q4 2016, the markets’ current expectation.
Meanwhile, we wouldn’t place much weight on the unchanged interest rate vote. Interest rate increases have been preceded by zero votes to raise rates just as frequently as when a small minority of members have voted to hike. As before, the timing of the rate rise is still ultimately in Mark Carney’s hands; interest rates have never risen without the governor voting to hike and the other four internal members rarely disagree with his stance ...
If our projections are right, core CPI inflation should have increased to about 1.5%, from 1% currently, by the time of May’s meeting. A Q2 rate rise is therefore still in play.”
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