Raising interest rates to deal with housing market problems would hit the rest of the economy too hard, Bank of England deputy governor Dame Nemat (Minouche) Shafik has told the BBC.
Advertisement
The MPC said it is unlikely to rise above 1% until the second half of next year due to weak global commodity prices and import costs as well as the dampening effect of sterling. Now it’s emerging markets.
The minutes revealed that for the third month running, Ian McCafferty was the only member of the Monetary Policy Committee (MPC) to vote for a rise in interest rates. It says although the country is growing at a slow pace as its economy rebalances towards consumption,”there is significant uncertainty about how smooth that rebalancing will be and a risk that growth slows more sharply”. “Inflation at the two-year horizon is marginally higher, but the path for inflation is now expected to be lower in the next year than was expected in the August Inflation Report”, adds McNeill.
He said it was a “reasonable expectation” that rates may rise at a few stage within the next year.
Carney’s assessment of the global outlook was less sanguine than Yellen’s. The central bank would like inflation to be in the two per cent range, rather than the zero range it is running right now. Prior to the BOE decision, contracts signaled an increase in November next year.
The British pound weakened sharply after the Bank of England on Thursday indicated that it will keep rates on hold at 0.5 percent for longer than previously thought. “This clear dovish shift in the BOE’s thinking seems a little odd in an environment where the growth numbers are looking pretty good”. Most of the risks emanate from overseas.
Pound Overvaluation Weighs on UK Economic Growth, Bleak Short-Term Sterling OutlookThe BoE’s assertion that the Pound’s recent bout of relative strength poses another problem for Britain’s tentative recovery is forecast to provide further near-term headwinds for the United Kingdom unit. It also cut its United Kingdom growth forecast for 2015 from 2.8% to 2.7%, as a result of the emerging market slowdown.
So the bank runs its models, based on what investors in the market are expecting to happen to interest rates.
The yield curve figures used by the Bank of England in its Inflation Report related to the 15-day average up to 28 October.
The feedback from the BoE was significantly more pessimistic than anticipated, and led to a sell-off in the pound after the data came out. In a letter to Chancellor of the Exchequer George Osborne published alongside the report, Carney said officials are ready to take “whatever action is needed”.
This change of tack, in combination with a lowering of medium term UK GDP growth and inflation targets, was bad enough. Oil prices are 14%.
Advertisement
The majority of the Bank’s policymakers felt that the more gloomy global growth picture, together with ongoing low inflation, meant rates should continue to remain on hold.
