EU risk, US caution to stall British rate hikes

BoE echoes Fed’s concerns

THE RISK of a new recession in the euro zone and caution from the US Federal Reserve are weighing on expectations of the timing of a first increase in British borrowing costs since the financial crisis started, potentially delaying it.

The Bank of England (BoE), as expected, kept the bank rate at a record low of 0.5 percent yesterday. It has sat at that level since the worst of the financial crisis five-and-a-half years ago.

Britain’s economy has staged a much stronger-thanexpected recovery since mid2013. But a combination of weak pay growth and inflation below the BoE’s 2 percent target has allowed the central bank to keep rates unchanged.

So far only two of the monetary policy committee’s (MPC’s) nine members have voted for a rate hike, but expectations have been strong for a hike as soon as February next year.

Now British policymakers are casting a nervous eye at the euro zone and in particular Germany, which this week announced a string of far weakerthan-expected economic data.

Adding to the sense that rate rises might come later than thought, the Fed has sounded worried about the impact of the slowdown in Europe, as well as in Asia.

In Britain, there are some tentative signs of a cooling. The British Chambers of Commerce warned yesterday of a “first alarm bell” for Britain’s rapid economic recovery after firms reported the weakest export growth in almost two years and a big slowdown in manufacturing.

London house prices also fell last month for the first time in more than three years, and prices nationwide showed their smallest increase in 15 months.

If sustained, the slowdown could feed into next year’s general election and Conservative Prime Minister David Cameron’s bragging rights over an improved economy.

Investors earlier yesterday showed they were less convinced that the BoE would raise interest rates early next year. Short-dated gilt prices rallied along with other major government bonds and short sterling interest rate futures – which are bets on when interest rates will rise – rose strongly.

“We’re leaning more and more towards June, and maybe it’ll even be after that,” Marc Ostwald at ADM Investor Services International said when asked when the BoE might kick off its long-awaited rate hikes.

The BoE made no statement alongside its monthly policy announcement, which included a commitment to maintain at £375 billion (R7 trillion) the stockpile of assets that it acquired under its programme of government bond purchases.

Minutes of the MPC’s meeting are due to be published in just under two weeks’ time.

The minutes of last month’s meeting suggested growing concern at the situation in Europe. MPC members felt “a prolonged period of poor growth and very low inflation could have a larger impact if it led once again to uncertainty about the sustainability of euro area public and external debt”. – Reuters