LONDON-The Bank of England on Thursday signaled that the need to raise borrowing costs in the United Kingdom anytime soon has receded given the gloomier prospects for global growth, after it held its benchmark interest rate steady.
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The central bank suggested in its latest quarterly inflation report that there would not likely be a hike in interest rates until 2017 and said that when there is it will be a gradual increase.
In giving a downbeat assessment on the global growth picture, the Bank said many emerging economies have slowed “markedly” this year. “There remain downside risks to this outlook, including that of a more abrupt slowdown in emerging economies”, says the MPC report. Overnight, comments from Fed Vice Chairman Stanley Fischer reiterated comments made Wednesday from Fed Chairman Yellen that the 2% inflation target was not that far off and despite a few worries, the American economy may be more prepared for a hike than a few believe.
Moreover, the new Threadneedle Street forecast was predicated on a collapse in market expectations of the pace of rate rises since the summer, meaning that without this stimulus the Bank’s inflation forecast would have fallen even more drastically.
Going forward, growth is forecast to remain at around this rate.
‘The surprise was that no-one joined Ian McCafferty in voting for an immediate 0.25% rate rise, ‘ said James Knightley, economist at ING.
It also predicted that United Kingdom inflation – which last month slipped into negative territory for the second time this year at minus 0.1% – would remain below 1% until the second half of next year.
The blue-chip index has trimmed losses since the BoE left rates unchanged at a record low today and revealed that only one member of its Monetary Policy Committee had backed a rate hike.
Despite that, the Bank’s forecasts for inflation and growth – which are based on the yield curve – have barely changed.
Growth forecasts in the United Kingdom have also been lowered from 2.8% to 2.7% in 2015, with a 0.1% reduction for 2016 and projected growth of 2.5%.
United Kingdom government bonds, which benefit from lower interest rates, rose slightly.
Thanks to what’s informally known as the Bank of England’s “Super Thursday”, the British Pound was smacked lower this morning after a seemingly unexpected pivot in tone from the Bank of England’s Monetary Policy Committee. Inflation is also expected to stay below 1% until at least mid-2016. Economists think that indicates that rates will not rise until the second quarter of next year and perhaps later. 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.
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Rates will have to go up to keep inflation on target, Carney said.
