In an interview with Britain’s Financial Times on Tuesday, Bank of England Governor Mark Carney said in an environment where rates are low for a long time, “vulnerabilities” can build. That means tighter and more active macroprudential policy should be expected in order to allow monetary policy to do its job.
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So what is implied through government bonds and interest rate swap market is not necessarily truly reflecting participants’ expectations of what is going to happen and should the downside risks from world economy fails to materialize and in absence of further shocks, she expects economy to warrant a steeper rate hike path from BOE, once wage growth falls in line with inflation returning. Britain’s unemployment rate unexpectedly fell to 5.2 percent from 5.3 percent in the three months to September, hitting a new seven-year low, the Office for National Statistics also said on Wednesday.
In the latest sign from policymakers that borrowing costs will remain on hold well into 2016, Shafik noted signs that the rate of earnings growth in the United Kingdom had “levelled off” recently and that other factors were also keeping inflation low, such as the strong pound and a drop in commodity prices.
Bank of England policy makers want to see stronger wage growth before hiking interest rates, which have been at the historic low of 0.5% since March 2009.
One of the most senior figures within the Bank of England has said she will “tread carefully” when it comes to a rate hike.
STUCK IN THE MIDDLE Another key consideration for the BoE is the impact a rate rise would have on sterling, which before the Fed decision was up 4 percent against a basket of currencies and up 6.6 percent against the euro so far this year. With inflation at minus 0.1 percent, there’s little pressure to act.
“There are many signs that the economy is normalising – the labour market is tightening, consumption growth is solid, investment is recovering, and even productivity growth is showing tentative signs of a return”, Shafik said.
On the outlook for inflation, she said an 18 percent appreciation of sterling that began in early 2013 had exerted significant downward pressure on inflation, and it would continue to have “some” effect for several years to come. Members voted 8-1 against increasing the Bank’s basic interest by 0.25%. Then, the curve suggested that the MPC would raise rates on only three occasions by the end of 2018, leaving Bank rate at just 1.25pc. Upon joining OANDA in 2007, he established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends.
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For the moment, all markets are tied up awaiting the US Federal Reserve’s widely expected rate hike on Wednesday, the first in nine years. “Having said that, I think all agents, and all members of the MPC, expect the future path to be gradual and limited”, she said.
