Economists do not expect interest rate rise until 2019

A survey of economists has revealed that UK interest rates are not expected to rise until 2019, despite inflation being above the Bank of England’s target.

A BBC survey found that the majority of economists believed the Bank of England Monetary Policy Committee (MPC) would not raise interest rates while Brexit negotiations are ongoing. Inflation is currently at 2.6%, above the official target rate of 2%.

The base interest rate has been at the record low of 0.25% since August 2016. Prior to that it stood at 0.5% since March 2009.

External MPC member Michael Saunders said in August that he thought interest rates should be raised soon to offset inflation. Saunders told a Cardiff conference: “We do not need to be putting the brakes on so much that the economy weakens sharply, but our foot no longer needs to be quite so firmly on the accelerator in my view.”

However, in the August meeting of the MPC, only Saunders and fellow member Ian McCafferty voted for an interest rate rise. The remaining six members voted to retain the current interest rate.

Saunders said that an increasingly constrained labour market, partly due to fewer EU migrant workers coming to the UK, pointed to a need for higher interest rates. In Q2 2017 the proportion of people aged 16-64 participating in the labour market reached a record high.

Bank of England’s Monetary Policy Committee votes to keeps UK Bank Rate at record low of 0.5%

Britain’s central bank, the Bank of England, announced on Thursday that its Monetary Policy Committee (MPC) has declared that the Bank Rate will be kept at a record low of 0.5% and will maintain the Asset Purchase Programme at GBP375bn.

Monetary policy is set by the MPC, which aims to meet the 2% inflation target in a way that helps to sustain growth and employment. The MPC voted by a majority of 8-1 to maintain Bank Rate at 0.5% at its meeting ending on 6 October. The vote to maintain the stock of purchased assets financed by the issuance of central bank reserves at GBP375bn was unanimous.

In August, the twelve-month CPI inflation was recorded at 0%, well below the 2% target rate. According to the Bank of England, about three-quarters of that deviation was reflected in unusually low contributions from energy, food and other imported goods prices, while the other quarter reflects the past weakness of domestic cost growth. Despite an increase in labour costs, these remain lower than would be consistent with meeting the inflation target in the medium term, were they to persist at current rates. Core inflation continues to be subdued at around 1%, which is influenced by restrained labour cost growth and also by muted import cost growth.

As a result of below target inflation and the possibility that spare capacity remains in the economy, the MPC said it intends to set monetary policy so as to ensure that growth is sufficient to absorb any remaining underutilised resources. This policy is necessary to ensure that inflation is on track to return sustainably to the 2% target rate within two years and is expected to support domestic cost growth.

According to the Bank of England, the most recent official estimates and survey data are consistent with a gentle deceleration in UK output growth since a peak at the beginning of 2014. Since the middle of 2013, there have been sharp declines in the unemployment rate, however the rate now appears to have levelled off. The MPC had expected some slowdown in the pace of the expansion and employment growth, as a natural consequence of the economy approaching a balance between its supply capacity and strengthening demand following the UK’s gradual recovery from the financial crisis. But it said there is increasing evidence that capacity pressures are developing in some segments of the economy, especially with a shortage in labour skills. In the private sector, annual regular pay growth has increased and is now more than 3%, but improvements in productivity growth have so far limited the impact of that pickup in pay growth on businesses’ overall costs, and therefore inflation, the MPC added.

Bank of England’s Monetary Policy Committee votes to keep Bank Rate at 0.5%

UK central bank the Bank of England announced on Thursday that its Monetary Policy Committee (MPC) meeting, held on 9 September 2015, the committee voted by a majority of 8-1 to maintain the Bank Rate at 0.5%.

The MPC, which sets monetary policy in order to meet the 2% inflation target and in a way that helps to sustain growth and employment, also voted unanimously to maintain the stock of purchased assets financed by the issuance of central bank reserves at GBP375bn.

According to the bank, twelve-month CPI inflation rose slightly to 0.1% in July but remains well below the 2% target rate. Unusually low contributions from energy, food and other imported goods prices were reflected in about three quarters of the gap between inflation and the target, while the remaining quarter reflects the past weakness of domestic cost growth and unit labour costs.

Despite a recovery in pay growth since the beginning of 2015, the recent increase in productivity means that the annual rate of growth in unit wage costs is currently around 1%, which is lower than would be consistent with meeting the inflation target in the medium term, if it was to persist.

In addition, the appreciation of sterling since mid-2013 is having a continuing impact on the prices of imported goods. These factors combined has resulted in the average of a range of measures of core inflation remaining subdued, although it picked up slightly in July to just over 1%.

Because of below target inflation, the MPC has collectively judged that there are some underutilised resources in the economy and intends to set monetary policy in order to ensure that growth is sufficient to absorb the remaining economic slack so as to return inflation to the target within two years.

In its August Inflation Report, the MPC said its aim of returning inflation to the target within two years was thought likely to be achieved conditional upon Bank Rate following the gently rising path implied by the market yields prevailing at the time. Private domestic demand growth is expected to be robust enough to eliminate the margin of spare capacity over the next twelve months, despite the continuing fiscal consolidation and modest global growth. In turn, an increase is expected in domestic costs needed to return inflation to the target in the medium term, as the temporary negative impact on inflation of lower energy, food and import prices declines.

The MPC has also noted that the risks to the growth outlook were skewed moderately to the downside, which in part reflects risks to activity in the euro area, as well as to prospects in China and other emerging economies. This has resulted in markedly higher volatility in commodity prices and global financial markets.

However, the MPC expects continued healthy domestic expansion, with domestic momentum being underpinned by robust real income growth, supportive credit conditions, and elevated business and consumer confidence. Also, unemployment rates have dropped by over 2 percentage points since the middle of 2013, although that decline has recently levelled off.

Bank of England to link interest rates to job growth

The Bank of England governor Mark Carney stated today that the Bank will not raise interest rates until the high rate of unemployment in the UK has decreased from the current rate of 7.8% to 7%, or below, when the Bank would then re-examine interest rates.

According to Carney, who was appointed as BoE governor last month, about 750,000 jobs would need to be created to achieve this reduction in the unemployment figures, which could take three years. He said the unemployment threshold will hold unless inflation levels threaten to rise too quickly or if it poses a significant threat to financial stability. Also, the Bank would not cut back on its £375bn asset purchase programme, known as quantitative easing (QE), until the threshold was reached.

Analysts reportedly expect unemployment to fall slowly from its current level to an average 7.1 percent in the third quarter of 2016, the end of the forecast horizon.This indicates that the BoE expects to maintain interest rates at the same level until at least then, unless its conditions are broken. However economic data is said to show that the recovery in the UK economy is picking up pace and the jobless rate could fall significantly faster than expected. Recent official figures also revealed that there was an upsurge in manufacturing output during June this year and research has shown that the service sector and housing market is growing. Experts have forecast that UK inflation will fall to 2% in mid-2015.

The Governor commented that: “While job growth has been a relative positive in recent years, unemployment is still high. There are one million more people unemployed today than before the financial crisis; and many who have jobs would like to work more than they currently can. The weakness in activity has also been accompanied by exceptionally weak productivity. It is for these reasons that the MPC judges there to be a significant margin of slack in the economy, even though the extent of that slack, particularly the scope for a productivity rebound, is very uncertain.”

Bank of England keeps rates and QE on hold again

UK interest rates have been maintained at a record-low 0.5% for another month.

The Bank of England announced today that its Monetary Policy Committee had voted not to change the official Bank Rate paid on commercial bank reserves.

With the economy struggling to return to growth since the global financial crisis erupted in 2008, rates have been held at 0.5% for more than four years.

The Committee also voted today not to restart the Bank of England’s asset-buying quantitative easing (QE) programme, with a majority of members voting that it is not necessary to add to the GBP375bn of government bonds purchased between March 2009 and October 2012.

Governor Sir Mervyn King and two other policymakers voted in February and March to increase QE but they were outvoted. Details of today’s vote have not yet been released.

Two weeks ago Chancellor George Osborne gave the Bank of England stronger backing to overlook one-off factors impacting on inflation. Despite the change to its mandate, the central bank is sticking with its current policy – for now at least.

Economists have speculated that further stimulus may be agreed later in 2013 following the arrival of Mark Carney, the current governor of the Bank of Canada, who is due to take over from Sir Mervyn as Bank of England governor in July.

The British Chambers of Commerce welcomed the decision to maintain QE at GBP375bn and hold interest rates at 0.5%. Commenting on the growing pressure for more QE later in the year, the business group’s chief economist, David Kern, claimed that such a move would be “misguided” and likely to “provide only marginal benefits for the real economy while heightening risks of financial distortions, bubbles and higher inflation.”

Stephen Gifford, director of economics at the CBI, agreed that with muted growth prospects and international uncertainty the possibility of further QE will remain open. He added, however, that the persistence of above-target inflation may act as a bar to looser policy on the issue.

Bank of England keeps interest rates and stimulus unchanged

The Bank of England said today that its Monetary Policy Committee (MPC) has voted to maintain interest rates at 0.5% and also resisted calls to inject more money into the economy to help stimulate recovery.

Rates have now been held at their record low level for four years.

At the February meeting of the rate-setting committee, Bank of England governor Sir Mervyn King and two others voted to increase the quantitative easing (QE) programme by GBP25bn to GBP400bn but they were outvoted. Some economists were expecting the bank to expand QE at the MPC’s March meeting.

This morning’s announcement was supported by the British Chambers of Commerce (BCC), whose chief economist, David Kern, expressed disappointment that the pressure for further bond-buying is mounting. “We believe this would be misguided, as more QE would provide only marginal benefits for the real economy, while heightening risks of financial distortions, bubbles and higher inflation,” he added.

Business group the CBI agreed that the prospect of further QE remains. Its director of economics, Stephen Gifford, said that the decision this month is likely to have been a close call.

With the UK economy shrinking again in the final quarter of 2012, all eyes are on the economic data emerging in the first quarter for signs of growth or contraction.

A new survey released today by EEF, the manufacturers’ organisation, and business advisers BDO shows that conditions in the manufacturing industry remain around a three-year low but the outlook is brighter. There are signs that manufacturers could see conditions turn around in the second quarter, with output and order balances expected to recover back to levels seen in the early part of last year.

Also today the BCC published its latest forecast for the UK economy, downgrading its prediction for growth in 2013 to 0.6% from the earlier expectation of 1.0% growth. Similarly, the organisation now expects the economy to grow by 1.7% in 2014, a reduction from the earlier figure of 1.8%.

Commenting on its revised outlook, the BCC said that UK businesses are resilient and have the ambition needed to drive the national recovery forward, but reduced global growth prospects, particularly in the eurozone, together with the ongoing need to repair Britain’s public finances, mean that the pace of the UK recovery will be restricted over the next couple of years.

Bank of England keeps interest rates at 0.5% and holds back from further QE

The Bank of England has maintained UK interest rates at 0.5% and also announced yesterday that it will not be extending its programme of quantitative easing (QE).

Rates have been held at a record low of 0.5% for three years.

Economists said that the decision by the Bank of England’s Monetary Policy Committee (MPC) was likely to have been close. Ian McCafferty, the CBI’s chief economic adviser, commented that another round of QE could not be ruled out but noted that the recovery is expected to be on a firmer footing in the second half of the year, as inflation eases and the global economy strengthens.

Minutes from last month’s MPC meeting showed that members of the committee were becoming more concerned about inflation, with the Consumer Prices Index (CPI) measure rising to 3.5% in March, from 3.4% in February. The Bank of England’s target rate for CPI inflation is 2% but it has been higher than this for 28 months, and according to the Telegraph most economists no longer believe that it will fall to 2% before the end of the year.

The minutes from April’s meeting also revealed that one member of the committee dropped his vote for more QE. This scheme, which is intended to boost the economy through buying bonds, was boosted to GBP325bn in February.

Confirmation that the economy appears ready to grow again came yesterday in a new report from the OECD, which said that the UK’s composite leading indicators – designed to anticipate turning points in economic activity – are showing stronger positive signals compared to the previous month’s assessment.