Britain’s economy has grown strongly for more than two years but inflation remains below zero and the Bank has kept rates at the level to which they were cut during the worst of the financial crisis almost seven years ago.
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The European Central Bank ramped up its stimulus efforts earlier this month in an attempt to lift inflation in the 19-nation eurozone back toward its target of just under 2 per cent.
Nick Dixon, investment director at Edinburgh-based life and pensions group Aegon UK, said: “Although MPC members who voted to hold rates had one eye on the US Fed’s decision next week, the MPC’s forward guidance indicate that rates will remain low for “some time”.
For the majority of officials at the BOE, the outlook for growth and inflation in the United Kingdom doesn’t yet justify an increase in the central bank’s benchmark rate. “There is certainly talk in the market that the bank could take a more hawkish tone”, said Tobias Davis, currency hedging manager with Western Union in London.
In the domestic financial markets, influenced mostly by expectations of a policy rate hike by the US Federal Reserve, stock prices have fallen, long-term market interest rates have risen, and the Korean won has depreciated against both the US dollar and the Japanese yen.
Sterling gained against the euro and traded at its highest in nearly three weeks against the dollar on Thursday ahead of a Bank of England statement that some are looking to for a more bullish tone on the timeline for interest rate hikes. With inflation at minus 0.1 percent, there’s little pressure to act.
Bank of England governor Mark Carney has already said a decision to raise rates in the U.S. is “not decisive” for United Kingdom policymakers, stressing any such move on these shores will be made according to United Kingdom economic conditions.
In the minutes of its December meeting, the Monetary Policy Committee weighed “robust growth” in spending against weak overseas demand and expressed concern over the feeble impetus for prices.
The BCC believes rates will rise in the third quarter of 2016, although it stresses that global economic woes could push it back further, while Investec Economists are pencilling in a rise in the second quarter of next year. The Statistics office is due to announce November inflation data on Friday. But “we still think that the MPC is likely to hike in Q2, about six months earlier than markets expect now”, he writes.
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The question we would dearly like our crystal ball to tell us, of course, is whether the rate hike, if it happens on 16 December, will lead to a rally similar to the one in 2004.
