For the US the debate is not indifferent with the Fed’s voting member Lockhart overnight calling for the start of rate hikes in September, but the market is expecting later in the year and we have two important nonfarm payrolls releases ahead of then, the first being on Friday.
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“It is much more of a factor for the UK”.
The Bank said the central estimate of the MPC was that there remains slack of 0.5 per cent of GDP in the economy, unchanged since its report in May, although it stressed that there was a “range of views” on this subject on the committee. In other words, as the labor market tightens, and we see that tightness in a number of ways, … the movements may take times and you may get these sort of blips that are there.
The MPC noted in the minutes that sterling had appreciated by 20pc on a trade weighted basis since 2013 and 3.5pc since its last forecast in May.
It also increased the forecast for expansion in the wider economy, from 2.5% to 2.8% amid strong consumer demand.
By contrast, wage rises are now accelerating (yes yes – about time too).
Sterling immediately weakened on the news, as expectations for the timing of the first interest rate rise were pushed back, noted Mr Brettell, meanwhile the FTSE 100 jumped. However the exact timing of the first move can not be predicted in advance. So, for instance, over the past couple of years, the average rate on a two-year fixed rate mortgage has dropped from just under 4% to just under 2%.
Carney said last month that the decision on when to raise interest rates would only come into sharper focus around the turn of the year.
They will have voted yesterday and announce their decision, as well as publish their Quarterly Inflation Report, at noon in London today.
The slew of data being published on a single date led to the event being dubbed “Super Thursday”.
Wage growth is at the centre of the MPC’s policy debate as officials assess labour-market tightness and the level of slack in the economy.
“Hawk” Ian McCafferty, an external policymaker who felt “on balance” that the risks of the Bank overshooting its inflation target were now “sufficiently to the upside to justify an immediate increase in Bank Rate”. Carney said inflation’s brief dip below zero was “the most striking development in the U.K.in the past year”. But unemployment figures have disappointed, with recent figures showing the first rise for more than two years.
In their latest forecasts, policy makers will have had to weigh faster wage growth against a stronger pound and lower oil and commodity prices.
The upshot is headline inflation rates are likely to remain depressed for far longer.
“The falls in energy prices of the past few months will continue to bear down on inflation at least until the middle of next year”, they added.
Strategists say BOE raising interest rates would drive sterling sharply higher, with potentially disastrous effects for UK companies selling goods and services to the euro zone and China.
The committee cited low inflation as the key element in the decision.
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Mark Carney needs to be careful to not overplay his hand today talking about higher UK interest rates.
