The Bank of England has struck a dovish tone in its quarterly inflation report, with sterling sliding on the back of its suggestion that inflation and interest rates may not rise as quickly as markets had expected.
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USA stock indices had dropped Wednesday after Federal Reserve chief Janet Yellen left on the table the possibility of an increase to United States interest rates in December.
There was good news for homeowners with a mortgage, however, as the Bank’s Monetary Policy Committee voted to keep base rates at their record low of 0.5 per cent.
So the emerging market turbulence has not only lowered the UK’s growth outlook it has also amounted to a de facto monetary tightening.
The pound fell a cent against the euro and the dollar after the Inflation Report, to just over 1.40 and 1.53 respectively. Yet the overall message from the Bank is nevertheless clear: rates can remain lower for longer without triggering excessive inflation next year.
BoE Governor Mark Carney signalled on Thursday that he was in no hurry to raise interest rates and he flagged risks to United Kingdom growth from external developments.
“The governor stated that the MPC was of the view that disinflationary pressures would persist for the next two years and observed that the United Kingdom would be importing a few disinflation some time to come”, he added.
The Bank also published the latest letter from Mr Carney to Chancellor George Osborne, explaining why inflation is more than 1% off its 2% target.
“The outlook for inflation reflects the balance between persistent drags from factors such as sterling and world export prices, and prospective further increases in domestic cost growth”.
United Kingdom government bonds, which benefit from lower interest rates, rose slightly. Economists think that indicates that rates will not rise until the second quarter of next year and perhaps later.
The eight-to-one vote indicates that the United Kingdom will not be raising rates anytime in the near future. The forecast for inflation two years from now is at 2.1%, as opposed to the 2% that was suggested in the August inflation report, pretty close to identical.
This week’s economic surveys suggested the United Kingdom economy held up better in October, pointing to growth edging back up to 0.6% in the fourth quarter, or even 0.7% if retailers enjoy a bumper Christmas, according to IHS Global economist Howard Archer. That said, I don’t expect this to deter the BoE in the coming months, instead I expect it to focus on the medium term outlook, the temporary nature of the low inflation and the risks to hiking too late.
The move to delay any increase for another 14 months took stockmarkets, lenders and businesses by surprise.
The Bank said inflation was likely to stay below 1 per cent until the second half of 2016, due overwhelmingly to lower costs for energy, food and other imports.
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The slow pick-up in inflation comes despite relatively robust growth forecasts.
