BoE holds key in­ter­est rate, cuts in­fla­tion out­look

The Pak Banker - - FRONT PAGE -

Mark Car­ney pre­dicted a bout of "muted" in­fla­tion in the UK af­ter all but one of the Bank of Eng­land's pol­icy mak­ers de­cided that price pres­sures are too weak to raise in­ter­est rates for now. The BoE gover­nor, pre­sent­ing an inau­gu­ral press con­fer­ence un­der a new regime for com­mu­ni­cat­ing pol­icy with mar­kets all in one go, said that the out­look is "con­sis­tent" with the need for in­ter­est-rate in­creases -- but only in due course.

"The ex­act tim­ing of the first move can­not be pre­dicted in ad­vance," he told jour­nal­ists in Lon­don on Thurs­day. "It will be the prod­uct of eco­nomic de­vel­op­ments and prospects. In short, it will be data de­pen­dent."

The 8-1 de­ci­sion by the Mon­e­tary Pol­icy Com­mit­tee to keep the bench­mark rate at a record-low 0.5 per­cent -- with Ian McCaf­ferty the dis­senter -- was un­ex­pected, with most econ­o­mists fore­cast­ing that at least one other would push for tight­en­ing. Of­fi­cials cut their out­look for U.K. in­fla­tion for the rest of this year, though min­utes of their meet­ing showed that some saw up­side risks and were di­vided on when to be­gin re­mov­ing more than six years of emer­gency stim­u­lus.

The min­utes were pub­lished along­side the MPC's de­ci­sion for the first time, part of a new com­mu­ni­ca­tions for­mat in­tro­duced by Car­ney and dubbed "Su­per Thurs­day." The BOE also re­leased its quar­terly In­fla­tion Re­port, in which it said the near-term out­look for in­fla­tion is muted and the re­cent de­cline in energy prices will have an ef­fect un­til at least the mid­dle of 2016.

"It's quite dovish," said David Tins­ley, an economist at UBS Group AG in Lon­don. "One of the largest sur­prises was that they didn't take any up­side news, re­ally, from pay growth."

Traders pared bets on the BOE rais­ing in­ter­est rates, with the im­plied yield on the short­ster­ling con­tract ma­tur­ing in De­cem­ber fall­ing 4 ba­sis points to 0.71 per­cent. In­vestors are fully pric­ing in a quar­ter-point rate in­crease by May next year, So­nia for­wards show.

The pound fell and was trad­ing at $1.5523 as of 1:21 p.m. Lon­don time, down 0.5 per­cent on the day. The 10-year gilt yield was lit­tle changed at 1.97 per­cent.

Price growth will av­er­age just 0.3 per­cent this year, down from 0.6 per­cent in May, be­fore ac­cel­er­at­ing to 1.5 per­cent in 2016, the BOE said.

The re­leases "sug­gest that an in­ter­est rate rise is still not im­mi­nent," said Sa­muel Tombs, an economist at Cap­i­tal Eco­nom­ics. The in­fla­tion out­look "sug­gests that most MPC mem­bers see the mar­ket ex­pec­ta­tions on which the forecast is based -- for in­ter­est rates to start ris­ing in spring 2016 -- as broadly cor­rect."

The view on the short-term out­look was echoed in the min­utes, where the MPC flagged a risk that the pound's ad­vance could weigh on in­fla­tion for a "per­sis­tent pe­riod."

"The near-term out­look for in­fla­tion is muted and the falls in energy prices over the past few months will con­tinue to bear down on in­fla­tion at least un­til the mid­dle of next year," Car­ney said. "Nonethe­less, a range of mea­sures sug­gest that medium-term in­fla­tion ex­pec­ta­tions re­main well an­chored."

That view chimed with a broader con­sen­sus on the com­mit­tee in its de­ci­sion. "In light of the re­duc­tion in oil prices and the ap­pre­ci­a­tion of ster­ling over the past three months, it ap­peared that the in­crease in in­fla­tion over the fol­low­ing year would be more grad­ual," the BOE said in the min­utes. Nev­er­the­less, "some mem­bers saw up­side risks to the in­fla­tion forecast" be­cause of stronger de­mand and pay growth and a smaller de­gree of spare ca­pac­ity than as­sumed.

For McCaf­ferty, those risks were enough to "jus­tify an im­me­di­ate" in­crease in the key rate to 0.75 per­cent.

Over the longer-term hori­zon, more rel­e­vant to the MPC's pol­icy, the BOE sees in­fla­tion at its 2 per­cent tar­get in two years and above that level -- at 2.1 per­cent -- a year later. Those pro­jec­tions are based on in­vestor ex­pec­ta­tions that don't have a rate in­crease fully priced in un­til the third quar­ter of 2016.

The dis­sent­ing vote marks the first split on the MPC this year and comes amid a back­drop of ac­cel­er­at­ing wage growth and the long­est streak of con­tin­ued eco­nomic ex­pan­sion since be­fore the re­ces­sion that started in 2008.

The econ­omy will grow 2.8 per­cent in 2015 -- higher than pre­vi­ously an­tic­i­pated -- and 2.6 per­cent next year, ac­cord­ing to the In­fla­tion Re­port pro­jec­tions. Wages will also rise faster this year than forecast in May, at a rate of 3 per­cent, and in­crease 3.75 per­cent in 2016.

But the fact that McCaf­ferty was alone came as a sur­prise af­ter a shift in sen­ti­ment to­ward tighter pol­icy in the past month, in­clud­ing com­ments from Car­ney him­self that the era of record-low rates would soon be end­ing.

In the In­fla­tion Re­port, the BOE of­fered an up­beat anal­y­sis of the U.K. econ­omy, say­ing pri­vate do­mes­tic de­mand will re­main ro­bust as real in­comes and con­fi­dence in­crease and credit con­di­tions im­prove. How­ever, it said there are down­side global risks, cit­ing in par­tic­u­lar the euro area and China. On the euro re­gion, it said the risk of a dis­or­derly out­come in the Greek debt cri­sis has re­duced.

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