Bank of England postpones rate rise to next May

Thrugelmir

Delivering the Bank's latest quarterly Inflation Report Governor Mark Carney said the Bank was using the market’s expectation of a rate rise next May in its own forecast.

Confirmation that we are not even close to a start in the normalisation of interest rates came as the Bank of England cut its forecast for UK economic growth this year to 2.5%, down from 2.9%.

Its policy makers have also trimmed GDP growth next year from 2.9% to 2.6% and for 2017 from 2.7% to 2.4%.

Carney cautioned that ‘persistent headwinds continued to weigh on the UK economy’ from the slowdown in the US and emerging market economies and from the further round of spending cuts planned by the government.

These would mean a more gradual increase in interest rates from their current low of 0.5% than previously thought.

The lower for longer path of interest rates is a response to the fact there is currently no inflation in the UK as a result of low oil and food prices.

Carney insisted these effects would be ‘relatively short-lived and that consumer prices would start to rise at the end of the year. Nevertheless, he did not expect inflation to return to the Bank’s target of 2% for another two years.

Also, despite government data showing wage growth in the first quarter, the Bank downgraded expectations saying earnings would probably rise by 2.5% this year, down from its previous forecast of 3.5%.

Carney said this was because of ‘underlying weakness’ in productivity, which offset improvements in consumer confidence brought on by lower food and energy prices and news today that unemployment fell to a near seven-year low of 5.5%.

http://citywire.co.uk/money/bank-of-england-postpones-rate-rise-to-next-may/a814612?re=34121&ea=237867&utm_source=BulkEmail_Money_Daily_Summary&utm_medium=BulkEmail_Money_Daily_Summary&utm_campaign=BulkEmail_Money_Daily_Summary

cells

interest rates might never go up again*

the natural state for interest rates is to fall as a nation develops until it gets to zero

The best way to think of interest rates is to think of them as an economies way of structuring how far into the future we should build and invest.

Low interest rates = invest further into the long term future
High interest rates = invest only for the near term


surely we are now at a point where we have met all our near term investment needs

wymondham

Not sure why they do predictions as all the previous rate warnings have been for nothing....


Am I still correct in thinking that so long as the rates stay this low the economy is rocky..? Rates rise only when there is confidence the rise can be absorbed without pain?

HAMISH_MCTAVISH

wymondham wrote: »

Am I still correct in thinking that so long as the rates stay this low the economy is rocky..? Rates rise only when there is confidence the rise can be absorbed without pain?

Rates will rise when the MPC judges that inflation is likely to be persistently above target for a prolonged period, and that this is caused by macro factors to which the correct response is to raise rates so they are likely to be looking for demand-pull inflation (too much money chasing too few products) rather than cost-push inflation (temporary one-off tax rises or commodity price spikes).

The current below target inflation rate has proved the MPC were right to look through the previous temporary burst of higher inflation as a result of tax rises and commodity spikes.

A booming economy with sustained growth in lending/money supply would certainly be the sort of thing likely to cause rates to rise.

An economy in modest growth with low inflation, still-restricted lending, and only moderate growth of M4 would not present a strong case to get rates up.... And that's pretty much where we are today.

michaels

HAMISH_MCTAVISH wrote: »

Rates will rise when the MPC judges that inflation is likely to be persistently above target for a prolonged period, and that this is caused by macro factors to which the correct response is to raise rates so they are likely to be looking for demand-pull inflation (too much money chasing too few products) rather than cost-push inflation (temporary one-off tax rises or commodity price spikes).

The current below target inflation rate has proved the MPC were right to look through the previous temporary burst of higher inflation as a result of tax rises and commodity spikes.

A booming economy with sustained growth in lending/money supply would certainly be the sort of thing likely to cause rates to rise.

An economy in modest growth with low inflation, still-restricted lending, and only moderate growth of M4 would not present a strong case to get rates up.... And that's pretty much where we are today.

Having an effectively unlimited supply of labour from the EU to draw on helps to contain any cost pressures. Only a sustained recovery in employment in the EU is likely to change this and even then their remains a huge pool of Eastern European workers for who British wages are much higher than local ones.

HAMISH_MCTAVISH

michaels wrote: »

Having an effectively unlimited supply of labour from the EU to draw on helps to contain any cost pressures. Only a sustained recovery in employment in the EU is likely to change this and even then their remains a huge pool of Eastern European workers for who British wages are much higher than local ones.

CPI is currently zero and wage inflation is currently over 2%.

Real terms wage inflation of 2%, so 2% above general inflation, is not historically unusual.

If mass migration was depressing wages (despite the reams of academic research that shows it isn't), then with CPI at zero surely you'd expect negative wage growth?

michaels

I seem to remember Carney's first foward guidance was that wage pressure shouldn't build up until unemployment fell below 7%.....

caronoel

I cant see rates rise above 0.5% until Q2 2017 at the earliest

Generali

HAMISH_MCTAVISH wrote: »

Rates will rise when the MPC judges that inflation is likely to be persistently above target for a prolonged period, and that this is caused by macro factors to which the correct response is to raise rates so they are likely to be looking for demand-pull inflation (too much money chasing too few products) rather than cost-push inflation (temporary one-off tax rises or commodity price spikes).

The current below target inflation rate has proved the MPC were right to look through the previous temporary burst of higher inflation as a result of tax rises and commodity spikes.

A booming economy with sustained growth in lending/money supply would certainly be the sort of thing likely to cause rates to rise.

An economy in modest growth with low inflation, still-restricted lending, and only moderate growth of M4 would not present a strong case to get rates up.... And that's pretty much where we are today.

There will be two factors that would cause the BoE to put up interest rates:

- The Fed does
- M4 starts rising quickly

As M4 is falling still, further QE is more likely than interest rate rises IMHO. However, US money supply (M2) is rising at 5.5% so the Fed may raise pretty soon. The results will be chaotic and unpredictable.