Bank signals rates rise within a year
Status quo for now, but hikes will probably be needed to keep a lid on inflation, says Governor
Households should prepare for an interest rate rise within a year if the economy continues to be buoyed by a booming jobs market and global recovery, the Bank of England has signalled. Policymakers held interest rates at a record low of 0.25 per cent, as they said stronger exports and investment would help to offset slower growth in consumer spending. The Bank cut its UK growth forecast, but Governor Mark Carney indicated rates might have to rise even if growth remains “sluggish”.
BRITISH households should prepare for an interest rate rise within a year if the economy continues to be buoyed by a booming jobs market and strengthening global recovery, the Bank of England has signalled.
Policymakers kept interest rates on hold at a record low of 0.25pc yesterday, as they said stronger exports and investment would help to offset slower growth in consumer spending amid a squeeze in real incomes.
External policymakers Michael Saunders and Ian Mccafferty reiterated their call to raise rates to 0.5pc as the Monetary Policy Committee (MPC) voted by a majority of 6-2 to keep rates unchanged.
Bank staff trimmed their growth forecasts to 1.7pc in 2017 and 1.6pc in 2018, down from a May projection of 1.9pc and 1.7pc respectively. Despite the downgrade, Mark Carney, the Bank’s Governor, said inflation would start to ease at the turn of the year. He also indicated that interest rates might have to rise even if growth remains “sluggish”.
Mr Carney said “prolonged low investment” and weak productivity meant even a “modest uptick in demand” could be enough to warrant rate hikes to keep a lid on inflation. However, the pound fell against the dollar and euro as economists said the tone of the report and uncertainty surrounding Brexit suggested policymakers would hold rates until at least the end of the year.
Mr Carney described the financial system as “rock solid” and added that
households remained in a “position of strength”, with unemployment now at a 40-year low.
The Governor also predicted that the City of London will continue to thrive in a post-brexit world as he said the financial sector could double in size over the next two decades. He told the Guardian that the sector had “many strengths” as he signalled that Brussels’ attempts to lure activity away from the City would not threaten London’s status as one of the world’s pre-eminent financial capitals.
“If the UK financial system thrives in a post-brexit world, which is the plan, it will not be 10-times GDP, it will be 15 to 20-times GDP in another quarter of a century because we will keep our market share of cross-border capital flows,” he said.
He added policymakers would need to “keep the focus” on maintaining post-crisis reforms as he warned of the dangers of watering down regulation.
Speaking at the launch of the Bank’s quarterly Inflation Report, Mr Carney said the squeeze on household finances from higher inflation would start to ease at the turn of the year. “We think we’re in the teeth of this right now,” he said. “As we move into the new year, we’ll see inflation will start to come down and household incomes start to move out of this real income squeeze.”
Financial markets currently expect two quarter-point rate rises by the start of the next decade, with the first priced in for the third quarter of next year.
The minutes of the August MPC meeting said: “If the economy were to follow a path broadly consistent with the August central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the path implied by [markets].”
A strengthening global recovery is expected to lift business investment and exports, even though investment levels are now forecast to be 20 percentage points below the Bank’s forecast before the Brexit vote by the end of the decade. Officials left their projections for inflation broadly unchanged, saying it was still likely to peak at around 3pc in the autumn. Policymakers trimmed their unemployment forecasts to 4.4pc for 2017, from a previous projection of 4.7pc.
Separate IHS Markit survey data yesterday showed Britain’s powerful services sector accelerated a touch in July, raising hopes that the economy overall is now gathering steam.
Mr Carney said policymakers’ main assumption of “a smooth transition to a new economic relationship with the UK will be tested”, and that bosses across the economy had made it “pretty clear” an implementation period was in the best interests of the UK and EU.