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Bank of England set to signal rates on hold until mid-2015

by International Commercial Investment on November 18, 2014

Source: Reuters

Governor Mark Carney is likely to signal that British interest rates will stay at a record low until around the middle of next year when he sets out the Bank of England’s latest economic outlook on Wednesday.

Economists polled by Reuters expect the central bank to trim forecasts for growth and inflation it published three months ago because prospects elsewhere in Europe have dimmed and a four-year low in oil prices is pushing down inflation.

Earlier this year, many in financial markets were predicting interest rates would have risen by now. But over the past couple of months expectations have been pushed back sharply, and now markets see rates on hold until at least August 2015.

Some economists think this overstates the BoE’s reluctance to start returning to something more like normal policy.

“I think it will be a little more dovish than last time — but what is striking is how the market is becoming super-dovish,” said Societe Generale economist Brian Hilliard.

Three weeks ago, BoE chief economist Andy Haldane said he had become gloomier about the economic outlook. He said a rate rise around the middle of next year — slightly sooner than some investors are expecting — was plausible.

Britain’s economy has grown much faster than expected over the past 18 months. Data due out at 0930 GMT is expected to show that the unemployment rate has fallen below 6 percent for the first time since late 2008.

The big fall in unemployment over the past year has yet to translate into meaningful inflation pressure. Wages are rising by only about 1 percent a year, and consumer price inflation hit a five-year low of 1.2 percent in September.

This is well below the BoE’s 2 percent target and where it expected inflation would be three months ago.

But the impact of lower oil prices on the BoE’s longer-run forecast may be small, as the Bank usually assumes one-off price drops have little lasting effect.

In August, the BoE forecast inflation would be 1.8 percent in two years’ time while economic growth in 2015 would slow to 3.0 percent from 3.5 percent this year but stay above its long-run trend.

International Commercial InvestmentBank of England set to signal rates on hold until mid-2015