UK cuts outlook and puts rates on ice
8-1 decision by committee
MARK Carney predicted a bout of “muted” inflation in the UK after all but one of the Bank of England’s (BOE) policymakers decided that price pressures were 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 the outlook was “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 yesterday.
“It will be the product of economic developments and prospects. In short, it will be data dependent.”
One dissenter
The 8-1 decision by the monetary policy committee (MPC) to keep the benchmark rate at a record low 0.5 percent – with Ian McCafferty the dissenter – was unexpected, with most econo- mists forecasting that at least one other would push for tightening.
Officials cut their outlook for UK 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 was muted and the recent decline in energy prices would have an effect until at least the middle of 2016.
“It’s quite dovish,” said David Tinsley, an economist at UBS Group 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 short-sterling contract maturing in December falling 4 basis points to 0.71 percent. Investors are fully pricing in a quarterpoint rate increase by May, Sonia forwards show.
The pound fell and was trading at $1.5523 (R19.8073) as of 1.21pm in London, down 0.5 percent on the day. The 10year gilt yield was little changed at 1.97 percent. Price growth would 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,” Samuel Tombs at Capital Economics said.
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.”
Muted outlook
“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 mediumterm inflation expectations remain well anchored.”
That view chimed with a broader consensus on the committee in its decision. – Bloomberg