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Bank of England to leave interest rates at 0.5% until well into next year Bank of England to leave interest rates at 0.5% until well into next year
(about 5 hours later)
The Bank of England has sent a reassuring message to businesses and households that interest rates are to remain at their record low well into next year as it cut its forecast for near-term inflation. The Bank of England is ready to step up controls on the housing market if a prolonged period of record low interest rates risks inflating a property bubble, governor Mark Carney has said.
The central bank signalled in its latest Inflation Report that interest rates would need to rise at some point from the current 0.5%, but it gave no indication that a move was imminent and reiterated that when borrowing costs do go up, they will do so gradually. As he signalled interest rates were likely to remain on hold well into next year, Carney suggested the Bank may have to revert to other measures, such as tighter lending rules, to keep a lid on house prices.
Rates have been at 0.5% since the depths of the global financial crisis more than six years ago. Minutes from the Bank’s latest rate-setting meeting, published alongside the report, showed that only one of the nine members of the monetary policy committee felt it was now time to start increasing rates. Ian McCafferty dissented from the rest of the MPC, as he has done in recent months, based on risks that inflation would start to pick up. Speaking after news from lender Halifax that house prices had jumped almost 10% from a year ago, he raised concerns households were saving less and some would end up overstretching themselves. More action could be warranted from the Bank, which has the power to clamp down further on mortgage lending as part of its macro-prudential tools.
“We do see house price growth picking up and in fact we see activity in the housing market picking up,” Carney said.
“We are conscious of those developments and as an institution as a whole we do have to think about the balance in the recovery and the potential financial stability implications of those developments, or the accentuation of those developments and that does bring into scope some macro-prudential considerations.”
Financial markets pushed back the chances of a rate rise over coming months following the Bank’s latest forecast for inflation to stay close to zero for now and rise only slowly next year.
Minutes from the Bank’s latest meeting released alongside those forecasts showed only one member of the nine-strong monetary policy committee felt now was the time to start raising interest rates after more than six years at a record low of 0.5%.
As in recent months, Ian McCafferty felt there was enough inflationary pressure to vote for a rate rise to 0.75%. The rest of the committee disagreed and, reflecting a broad range of views in recent speeches, the minutes highlighted divisions among policymakers over the outlook for troubled emerging markets such as China, inflation and growth.
“This does not look like a committee that is of a mind to push rates up any time soon,” said Philip Shaw, economist at broker Investec.
But Carney was at pains to remind households and businesses that borrowing costs will eventually have to rise, and he warned them to prepare for a move next year. He cited surveys suggesting two-thirds of households expect a rate rise over the coming 12 months. “Given these forecasts, that is a reasonable expectation,” he told a press conference.
He later underscored that message in a television interview.
“Would I rather have the majority of the British people thinking that rates are likely to go up in the next year, which is the case today? Yes I would, because that is reasonably prudent behaviour, given the progress this economy is making,” he told Bloomberg Television.
The Bank used its latest Inflation Report to reassure borrowers and businesses that when interest rates do start to rise, they will do so only slowly and to a lower level than in the past.
Related: Interest rate decision shows Bank of England doves still rule the roostRelated: Interest rate decision shows Bank of England doves still rule the roost
The Bank’s quarterly outlook said that based on recent falls in oil and other commodity prices, “inflation is likely to remain lower than previously expected until late 2017” and return to the government target of 2% in about two years’ time, then rise above it. The latest official figures put inflation at -0.1%. “All members agree that, given the likely persistence of the headwinds weighing on the economy, when Bank rate does begin to rise, it is expected to do so more gradually and to a lower level than in recent cycles. This guidance is an expectation, not a promise,” said Carney.
The report also flagged a weaker outlook for global growth than at the time of its last forecasts in August, with the MPC on Thursday downgrading the prospects for emerging market economies. Such an outlook would continue to influence the UK economy and the path of interest rates. The governor, who is almost halfway through a five-year term, said in July that the decision over when to start raising rates “will likely come into sharper relief around the turn of this year.” Since then, global growth has lost momentum while in the UK, low oil prices and cheap imports have pulled inflation down to below zero – way off the Bank’s target of 2%.
“All members agree that, given the likely persistence of the headwinds weighing on the economy, when Bank rate does begin to rise, it is expected to do so more gradually and to a lower level than in recent cycles. This guidance is an expectation, not a promise,” the inflation report said. Asked if he regretted that earlier guidance on rate rise decisions, Carney said: “Absolutely not. No regrets.”
The Bank’s quarterly outlook said that based on recent falls in oil and other commodity prices, “inflation is likely to remain lower than previously expected until late 2017” and return to the target of 2% in about two years’ time, then rise above it.
The report also flagged a weaker outlook for global growth than at the time of the Bank’s last forecasts in August, with the MPC on Thursday downgrading the prospects for emerging market economies. Such an outlook would continue to influence the UK economy and the path of interest rates.
Policymakers were more upbeat about the UK domestic outlook.Policymakers were more upbeat about the UK domestic outlook.
“Domestic momentum remains resilient. Consumer confidence is firm, real income growth this year is expected to be the strongest since the crisis, and investment intentions remain robust,” the report said.“Domestic momentum remains resilient. Consumer confidence is firm, real income growth this year is expected to be the strongest since the crisis, and investment intentions remain robust,” the report said.
The Bank played down worries the UK economy had stepped down a gear after the latest official figures showed GDP growth slowed in the third quarter. But Carney conceded the government spending cuts had been “material” and economists warned that there will be further pressures on the UK economy when the next round of austerity is revealed by chancellor George Osborne at his spending review later this month.
“Although it has moderated, growth is projected to pick up a little towards the middle of next year, as a tighter labour market and stronger productivity support real incomes and consumption, and as accommodative credit conditions encourage strong investment and a pickup in the housing market,” the report said. “Together with persistence of emerging markets and currency-related headwinds, 2016 will bring new challenges for the UK, including fiscal tightening and uncertainty about the EU referendum,” said Anna Stupnytska, global economist at Fidelity International.
On the back of a low oil price and cheap imported goods the Bank forecasts inflation will remain close to zero for the rest of this year and although it will start rising around the turn of the year it will probably stay below 1% until the second half of 2016. “This means that once the first hike is out of the way, the pace thereafter is likely to be extremely slow. The BoE will have to continue treading with caution.”
Inflation is forecast to rise gradually from the start of 2016 and then reach the Bank’s target of 2% in about two years and then rise above it. That is based on interest rates following the path expected by the City, with a first increase to 0.75% in the first half of 2017.
In an open letter to George Osborne, explaining why inflation was so far off target, the Bank’s governor, Mark Carney, pointed to lower commodity prices, a stronger pound – which makes imports cheaper – and soft wage growth.
The majority of economists in a Reuters poll had forecast that only McCafferty would vote for a rise this month, having done so for the previous three months. But some economists had predicted at least one other policymaker would join him in voting for a hike given some of their recent comments as well as signs from the US central bank that it could raise rates there in December.