The Bank of England kept interest rates on hold once again and signalled the cost of borrowing will not rise for at least another year, amid global growth concerns and ultra-low United Kingdom inflation.
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Mark Carney, the bank’s governor, had previously suggested the rise from the record low of 0.5 per cent could come early in 2016 and Janet Yellen, chair of the Federal Reserve, said only this week that a USA rate rise in December remained a “live possibility”.
It came as the Bank’s nine member Monetary Policy Committee voted eight to one to freeze its base rate at 0.5%.
“Many emerging market economies have slowed markedly and the Committee has downgraded its assessment of their medium-term growth prospects”, the minutes of the meeting showed. The Bank of England (BoE) was gloomy on both growth and inflation forecasts – in particular, the more negative inflation forecasts have put the brakes on the push towards a United Kingdom rate rise.
Kallum Pickering, senior United Kingdom economist at Berenberg, said last week’s growth data “showed the United Kingdom is not immune to risks from abroad” following the China slowdown, emerging market rout and financial volatility over the past three months.
Sterling and British government bond yields fell sharply on Thursday after the BoE surprised investors by giving no clear sign about when interest rates might go up for the first time before the financial crisis.
“Under the central case set out in today’s Inflation Report, the MPC judges it more likely than not that Bank Rate will need to increase over the forecast period”, Carney said in his letter, without providing any additional clues on the timing.
Indeed, a slightly different BoE forecasting basis – which looks at the “mean” outcome for inflation, including downside risks – still saw inflation at the Bank’s 2 per cent target in two years’ time.
NIESR said rates may rise as early as February, but admitted there was an “increased probability” of a move in the second quarter.
The pound sank against the dollar and euro in reaction to comments that implied a rate hike was off the agenda for 2016, dealers said. United Kingdom interest rates have now remained on hold for six-and-a-half years.
It was this latter expectation that the BoE used as a working assumption in its forecast update, which predicts that inflation – now below zero – would nudge above 2 per cent in two years” time on a so-called “modal’ projection basis.
In its post-meeting statement the MPC highlighted that about four-fifths of the difference between the latest reading for the consumer price index, at -0.1% year-on-year, and its target of 2% was the result of falls in energy, food and other imported prices. That is the Bank of England’s standard procedure as it tries to convince businesses and households that it can read the path of economic recovery and indicate when the next interest rate change is coming.
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However a signal has been provided that the market’s expectations for future rate rises are too far away.
