BoE says rate hike tim­ing is still a ques­tion

Kuwait Times - - BUSINESS -

LON­DON: Bank of Eng­land Gov­er­nor Mark Car­ney said he did not know when Bri­tish in­ter­est rates should start to rise, once again sound­ing vaguer than be­fore about when the BoE might be­gin eas­ing the econ­omy off record-low bor­row­ing costs.

“The ques­tion in my mind is when is the ap­pro­pri­ate time for in­ter­est rates to in­crease, and that is strongly con­sis­tent with the strength of the do­mes­tic econ­omy,” Car­ney told mem­bers of Bri­tain’s par­lia­ment yes­ter­day.

The BoE sur­prised many in­vestors ear­lier this month when it showed no sign that it was gear­ing up for an in­crease in in­ter­est rates, say­ing Bri­tain’s near-zero in­fla­tion would pick up only slowly even if rates stay on hold through­out next year.

Car­ney said then that the Bank would raise rates when the time was right. Be­fore that, he had said a de­ci­sion on whether to raise rates would come into sharper fo­cus around the end of this year. But that was be­fore the deep­en­ing of the slow­down in the global econ­omy which has kept most BoE rate-setters on the fence.

The cau­tious tone of the BoE has con­trasted with the clearer mes­sage from the Fed­eral Re­serve that a first US rate rise is likely to come next month. Car­ney has strug­gled pre­vi­ously with his at­tempts to give a clear steer on when rates might go up. His guidance was first knocked off course by a sur­prise plunge in Bri­tain’s un­em­ploy­ment rate and then by the slump in global oil prices.

Bri­tain’s econ­omy grew faster than any other big de­vel­oped na­tion last year and will be among the top per­form­ers in 2015. But wage growth re­mains be­low pre-cri­sis lev­els and the lat­est in­fla­tion data showed prices fell in the 12 months to Oc­to­ber.

Only one of the BoE’s nine mon­e­tary pol­i­cy­mak­ers has voted for a rate hike in re­cent months.

Fi­nan­cial mar­kets have been bet­ting on a first BoE rate hike only in early 2017, al­though most econ­o­mists ex­pect the Bank to move well be­fore then, prob­a­bly in the first half of 2016.

In his com­ments to law­mak­ers yes­ter­day, Car­ney showed he still ex­pected bor­row­ing costs to rise even­tu­ally, say­ing the econ­omy would in­creas­ingly re­quire a higher level of neu­tral rates as it re­cov­ered from the fi­nan­cial cri­sis. “I do think that the real equi­lib­rium in­ter­est rate in the United King­dom has turned pos­i­tive and as some of the head­winds ... re­duce. It will in most like­li­hood con­tinue to rise,” he said.

But Car­ney also said pro­duc­tiv­ity was more likely to ex­ceed than un­der­shoot the BoE’s lat­est fore­casts, re­duc­ing the pres­sure on in­fla­tion, a view shared by rel­a­tively dovish Mon­e­tary Pol­icy Com­mit­tee mem­ber Gert­jan Vlieghe.

Ster­ling fell ear­lier yes­ter­day af­ter the BoE’s chief econ­o­mist Andy Hal­dane said he saw more down­side risks to growth and in­fla­tion than re­flected in the Bank’s lat­est eco­nomic out­look, and he re­it­er­ated his view that the BoE’s next move might be a rate cut.

“I see the bal­ance of risks around UK GDP growth and in­fla­tion as skewed ma­te­ri­ally to the down­side, more so than em­bod­ied in the Novem­ber 2015 In­fla­tion Re­port,” Hal­dane said in an an­nual state­ment to par­lia­ment’s Trea­sury Com­mit­tee.

The only pol­i­cy­maker yes­ter­day who sounded close to rais­ing rates was Kristin Forbes, who re­stated her view that rates would need to rise “sooner rather than later” though labour mar­ket pres­sures were not yet strong enough. — Reuters

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