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OECD: BOE Should Raise Key Interest Rate To 3.5% By End 2011
inspector_monkfish
Posts: 9,276 Forumite
09:45 26May10 - OECD FORECASTS UK OUTPUT GROWTH OF 2.2% 2010, 2.6% 2011
09:45 26May10 - OECD: BOE Should Raise Key Interest Rate To 3.5% By End 2011
OECD: BOE Should Raise Key Interest Rate To 3.5% By End 2011
LONDON--The Bank of England should raise its key interest rate to 3.5% by end 2011, with the monetary tightening and a scaling back in quantitative easing starting in the second half of 2010, the Organization for Economic Cooperation and Development said Wednesday.
In its economic outlook report, the OECD said loose monetary policy was appropriate to support economic activity but that the central bank should start normalizing policy soon to respond to a likely gradual rise in underlying inflation and help preserve credibility.
It acknowledged that the reversal of an earlier sales tax cut and higher fuel prices have contributed to the recent acceleration in U.K. consumer price inflation, which rose even further above the BOE's 2.0% target to 3.7% in April, and that inflation is likely to fall below the target ahead.
"Notwithstanding the temporary nature of these price developments, the gradual drift up of some measures of inflation expectations implies a need to increase interest rates earlier than previously thought and no later than the last quarter of 2010", the OECD said.
"The projected increase of core inflation to the Bank of England target warrants an increase of the policy rate to 3.5% by end-2011."
By contrast, market interest rates suggest investors expect the BOE's key policy rate to be no higher than 1.50% by the end of 2011.
The OECD noted that more rapid public spending cuts in the U.K. would "leave room for a more gradual normalization of monetary policy".
But if bond yields rise faster than expected or inflation expectations move further away from the BOE's target, the central bank may have to tighten policy faster to maintain its credibility, it warned.
The BOE in February suspended its quantitative easing policy of buying U.K. government bonds with freshly created central bank money, but has maintained its stock of purchases at GBP200 billion and kept open the possibility that it could ease conditions further. Its key interest rate has stood at an all-time low of 0.5% since March 2009.
Wednesday's report marks a change in the OECD's view on the U.K.. In its November report, the body said that the BOE shouldn't begin to tighten monetary policy until 2011, and that extending its bond-buying scheme even further could promote economic recovery.
The thinktank also recommended that the U.S. Federal Reserve, the Bank of Canada and the European Central Bank all start to tighten policy this year. But in the latter case, it said that no more than a 100 basis point hike from the current 1% would be warranted by the end of 2011.
That would leave euro-zone interest rates well below those in the U.K.
The OECD forecasts inflation in the U.K. to average 3.0% this year, before dropping back to 1.5% in 2011. It expects core inflation, which excludes volatile energy, food, alcohol and tobacco prices, to average 2.4% in 2010 and to slip to 1.3% next year.
The new U.K. government is under intense pressure to tighten its fiscal belt as international rating agencies threaten to cut the country's triple-A credit rating unless public debt is reduced. Investors too remain sensitive to state of public fanances.
The U.K. Treasury Monday announced spending cuts of GBP6.25 billion for the current financial year, but the reductions are only the beginning of painful action to pare back the U.K.'s GBP156 billion budget deficit. Tough decisions lie ahead.
The OECD said the U.K.'s weak fiscal position and the risk of significant increases in bond yields make further fiscal tightening vital.
It noted that fiscal deficits are projected to remain above 10% of output in 2010 and 2011, and the gross public deficit is expected to increase to 86% of output next year.
"Return to fiscal sustainability requires further consolidation, which should be announced early and supported by a strong and credible medium-term fiscal framework", the OECD said. "A fully articulated fiscal plan would help the recovery by damping worries about sustainability and containing increases in bond yields and inflation expectations."
The think-tank said risks surrounding its projections seemed to be broadly balanced, although it noted that the amelioration of financial conditions could support a faster rebound in household consumption.
It said the significant improvement seen in the health of the financial
sector has reduced the risks linked to the large stakes that the U.K. government took in banks during the crisis.
"While the improving health in the financial system is encouraging, these positive short-term developments should not hold back efforts to develop an improved macroprudential framework," it said.
09:45 26May10 - OECD: BOE Should Raise Key Interest Rate To 3.5% By End 2011
OECD: BOE Should Raise Key Interest Rate To 3.5% By End 2011
LONDON--The Bank of England should raise its key interest rate to 3.5% by end 2011, with the monetary tightening and a scaling back in quantitative easing starting in the second half of 2010, the Organization for Economic Cooperation and Development said Wednesday.
In its economic outlook report, the OECD said loose monetary policy was appropriate to support economic activity but that the central bank should start normalizing policy soon to respond to a likely gradual rise in underlying inflation and help preserve credibility.
It acknowledged that the reversal of an earlier sales tax cut and higher fuel prices have contributed to the recent acceleration in U.K. consumer price inflation, which rose even further above the BOE's 2.0% target to 3.7% in April, and that inflation is likely to fall below the target ahead.
"Notwithstanding the temporary nature of these price developments, the gradual drift up of some measures of inflation expectations implies a need to increase interest rates earlier than previously thought and no later than the last quarter of 2010", the OECD said.
"The projected increase of core inflation to the Bank of England target warrants an increase of the policy rate to 3.5% by end-2011."
By contrast, market interest rates suggest investors expect the BOE's key policy rate to be no higher than 1.50% by the end of 2011.
The OECD noted that more rapid public spending cuts in the U.K. would "leave room for a more gradual normalization of monetary policy".
But if bond yields rise faster than expected or inflation expectations move further away from the BOE's target, the central bank may have to tighten policy faster to maintain its credibility, it warned.
The BOE in February suspended its quantitative easing policy of buying U.K. government bonds with freshly created central bank money, but has maintained its stock of purchases at GBP200 billion and kept open the possibility that it could ease conditions further. Its key interest rate has stood at an all-time low of 0.5% since March 2009.
Wednesday's report marks a change in the OECD's view on the U.K.. In its November report, the body said that the BOE shouldn't begin to tighten monetary policy until 2011, and that extending its bond-buying scheme even further could promote economic recovery.
The thinktank also recommended that the U.S. Federal Reserve, the Bank of Canada and the European Central Bank all start to tighten policy this year. But in the latter case, it said that no more than a 100 basis point hike from the current 1% would be warranted by the end of 2011.
That would leave euro-zone interest rates well below those in the U.K.
The OECD forecasts inflation in the U.K. to average 3.0% this year, before dropping back to 1.5% in 2011. It expects core inflation, which excludes volatile energy, food, alcohol and tobacco prices, to average 2.4% in 2010 and to slip to 1.3% next year.
The new U.K. government is under intense pressure to tighten its fiscal belt as international rating agencies threaten to cut the country's triple-A credit rating unless public debt is reduced. Investors too remain sensitive to state of public fanances.
The U.K. Treasury Monday announced spending cuts of GBP6.25 billion for the current financial year, but the reductions are only the beginning of painful action to pare back the U.K.'s GBP156 billion budget deficit. Tough decisions lie ahead.
The OECD said the U.K.'s weak fiscal position and the risk of significant increases in bond yields make further fiscal tightening vital.
It noted that fiscal deficits are projected to remain above 10% of output in 2010 and 2011, and the gross public deficit is expected to increase to 86% of output next year.
"Return to fiscal sustainability requires further consolidation, which should be announced early and supported by a strong and credible medium-term fiscal framework", the OECD said. "A fully articulated fiscal plan would help the recovery by damping worries about sustainability and containing increases in bond yields and inflation expectations."
The think-tank said risks surrounding its projections seemed to be broadly balanced, although it noted that the amelioration of financial conditions could support a faster rebound in household consumption.
It said the significant improvement seen in the health of the financial
sector has reduced the risks linked to the large stakes that the U.K. government took in banks during the crisis.
"While the improving health in the financial system is encouraging, these positive short-term developments should not hold back efforts to develop an improved macroprudential framework," it said.
Please take the time to have a look around my Daughter's website www.daisypalmertrust.co.uk
(MSE Andrea says ok!)
(MSE Andrea says ok!)
0
Comments
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I hope they wait until I've achieved part of my overpayment quest or I'm in a bit of trouble!0
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Interesting reading. I've been wondering a lot (as I don't have a life really;)) about when the QE would be withdrawn. There is a part of me suprised it hasn't happened already, but I'm a relatively uninformed idiot so that could be completely wrong.
But it is also interesting that there is now a prediction of rates up to 3.5% by end of next year. That is a little higher than a few on here have speculated. In addition, the OECD seem to feel there is an inflationary risk if we/the BoE aren't careful...
Interesting times...It's getting harder & harder to keep the government in the manner to which they have become accustomed.0 -
Then again
MPC's Adam Posen warns Britain at risk of Japan-style deflation
http://www.telegraph.co.uk/finance/f...deflation.html'Just think for a moment what a prospect that is. A single market without barriers visible or invisible giving you direct and unhindered access to the purchasing power of over 300 million of the worlds wealthiest and most prosperous people' Margaret Thatcher0 -
Then again
MPC's Adam Posen warns Britain at risk of Japan-style deflation
http://www.telegraph.co.uk/finance/f...deflation.html
Oh well, could be worse, we could be in the Euro.
Imagine that.US housing: it's not a bubble
Moneyweek, December 20050 -
Then again
MPC's Adam Posen warns Britain at risk of Japan-style deflation
http://www.telegraph.co.uk/finance/f...deflation.html
Check out the M4 numbers.
https://forums.moneysavingexpert.com/discussion/comment/33176881#Comment_33176881
Oh dear...0 -
Check out the M4 numbers.
https://forums.moneysavingexpert.com/discussion/comment/33176881#Comment_33176881
Oh dear...
Nominal growth for Q1 2010 was 2.1%.
Could really do with another 12 quarters like that!US housing: it's not a bubble
Moneyweek, December 20050 -
There is so much conflicting information ATM. It is almost impossible to plan ahead.In case you hadn't already worked it out - the entire global financial system is predicated on the assumption that you're an idiot:cool:0
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kennyboy66 wrote: »Nominal growth for Q1 2010 was 2.1%.
Could really do with another 12 quarters like that!
Indeed! Unfortunately, the YoY trend is pretty obvious (perhaps bottoming out - we can hope so anyway):
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There is so much conflicting information ATM. It is almost impossible to plan ahead.
[EMAIL="F@&k"]F$&k[/EMAIL] it then!
Lets just spend spend spend :j:beer::):TPlease take the time to have a look around my Daughter's website www.daisypalmertrust.co.uk
(MSE Andrea says ok!)0 -
inspector_monkfish wrote: »F$&k it then!
Lets just spend spend spend :j:beer::):T
We don't all earn your kinda salary/bonuses dude. We mere mortals have to cut our cloth accordingly!;)It's getting harder & harder to keep the government in the manner to which they have become accustomed.0
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