LONDON: The prospect of a UK interest rate rise has receded further after the Bank of England cut its forecasts for growth, wages and inflation. However, the governor, Mark Carney, warned borrowers against getting too comfortable with rock-bottom rates.
Carney quashed recent market speculation that a global economic slowdown could prompt a rate cut. But at the same time, the Bank revealed that its policymakers had voted unanimously to hold borrowing costs this month and they gave little indication that there would be an early increase.
The Bank governor used his quarterly inflation report briefing to say that after almost seven years at a record low of 0.5%, interest rates were “more likely than not” to need to go up over the next two years.
He also cautioned against repeating the mistakes of the past, when rate rises had come as a shock to indebted households and businesses, and said he wanted to send a clear message to households.
“We are trying to inform the markets, and most importantly households and businesses in this country, what’s likely to happen on rates,” Carney said.
“It is helpful, in my opinion, for households and businesses to recognise that it’s more likely than not that rates are going to go up and to plan their affairs accordingly, particularly since while there’s been tremendous progress – British households have done a great job in paying down debt – they are still relatively indebted.”
The comments come after Carney was forced to row back on a suggestion made last summer that a decision on starting to raise interest rates would “come into sharper relief” around now. On Thursday, he insisted he would not allow the Bank to “tie our hands” with guidance.
The tone of the Bank’s latest outlook for the economy suggested that policymakers would be in no hurry to raise rates. Economists do not expect a move until the end of this year, according to a Reuters poll before Thursday’s update from the Bank. Financial markets are not pricing in a rise for another two years.
After a tumultuous start to the year on financial markets thanks to jitters over China’s economic slowdown, the Bank predicted that emerging economies were likely to grow more slowly than in recent years and that global growth would be “only modest”.
But Carney said the UK was well placed to cope with global headwinds thanks to high employment, strong domestic demand and a better capitalised banking sector.
“As one of the most open economies in the world, the UK cannot help but be affected by an unforgiving global environment and sustained financial market turbulence,” he said.
“However, our prospects for a continued solid expansion are underpinned by the resilience built over the past seven years.”
The governor’s remarks came alongside the Bank’s quarterly deluge of documents, including minutes from the latest interest rate decision and the inflation report with forecasts for the economy.
The pound initially weakened against the euro and the US dollar as those minutes revealed that policymaker Ian McCafferty dropped his recent backing for a rate rise. He had voted against the eight other members of the monetary policy committee since last August, but this month agreed with his colleagues that it was too soon to raise interest rates.
Sterling later bounced back as traders digested Carney’s message that interest rates were more likely to rise than fall.
The Bank softened its outlook for inflation, which has been close to zero for a year as global commodity prices have tumbled. At 0.2% in December, it was well below the Bank’s target of 2%, measured on the consumer prices index (CPI).
“The scale of recent commodity price falls means that CPI inflation is likely to remain below 1% until the end of the year,” the inflation report (pdf) said.
One of the key factors behind McCafferty’s change of heart and the Bank’s softer inflation forecasts was lacklustre wage growth. That had come in weaker than the MPC had been expecting and policymakers were cautious about predicting any significant pick-up over the coming months.
They noted signs that wage negotiations were being affected by low inflation, with employers perhaps less generous and workers being less demanding given that they were enjoying a boost to household budgets from cheaper fuel and food.
As headline inflation picked up, nominal wage growth would “in all likelihood” increase. However, the MPC said there were downside risks to such a view.
On the outlook for economic growth, the Bank repeatedly used the word “resilient” with regard to household and business spending. But the MPC cut its forecasts and now expects GDP growth of 2.2% this year, down from 2.5% previously. The outlook for 2017 growth was cut to 2.4% from 2.7%.