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| Bank of England signals ‘earlier’ interest rate hikes for UK as Brexit looms | Bank of England signals ‘earlier’ interest rate hikes for UK as Brexit looms |
| (35 minutes later) | |
| Interest rates can be expected to rise “somewhat earlier” according to Bank of England, priming households and companies to expect a higher cost of borrowing in the coming years, even as the UK prepares to leaves the European Union and “decouples” from the booming global economy. | Interest rates can be expected to rise “somewhat earlier” according to Bank of England, priming households and companies to expect a higher cost of borrowing in the coming years, even as the UK prepares to leaves the European Union and “decouples” from the booming global economy. |
| The Bank, which raised interest rates for the first time in a decade in November to 0.5 per cent, kept rates on hold on Thursday, but its Monetary Policy Committee stressed, in a hawkish emphasis, that it sees a need for monetary policy to tighten more rapidly than it did three months ago to contain a “rising degree of excess demand” and building domestic inflationary pressures. | The Bank, which raised interest rates for the first time in a decade in November to 0.5 per cent, kept rates on hold on Thursday, but its Monetary Policy Committee stressed, in a hawkish emphasis, that it sees a need for monetary policy to tighten more rapidly than it did three months ago to contain a “rising degree of excess demand” and building domestic inflationary pressures. |
| “Were the economy to evolve broadly in line with...projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater degree over the forecast period than anticipated [in] November,” the minutes of the MPC meeting said. | “Were the economy to evolve broadly in line with...projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater degree over the forecast period than anticipated [in] November,” the minutes of the MPC meeting said. |
| In November the Bank’s Governor, Mark Carney, had said two more rate rises were likely to be necessary by the end of 2020 to keep inflation at the official 2 per cent target. | In November the Bank’s Governor, Mark Carney, had said two more rate rises were likely to be necessary by the end of 2020 to keep inflation at the official 2 per cent target. |
| Financial markets at that time were pricing in another rate rise late this year and another in the second half of 2020. The hawkish tone of the latest minutes may prompt traders to bring forward their estimate of the next rate rise and to expect three, or perhaps more, hikes in borrowing costs by the end of 2020, rather than two. | |
| Despite the shift in the Bank’s rhetoric, the overall GDP growth and inflation forecasts from the Bank in its latest Inflation Report were largely unchanged on November’s. Calendar year growth in 2018 is seen as coming in a 1.8 per cent, up from 1.6 per cent previously, largely reflecting stronger global growth. | |
| But for 2019, the year of Brexit, and 2020 the GDP forecast is unchanged at 1.7 per cent. These are notably stronger estimates than those from many private forecasters and also estimates from the IMF and the OECD, who expect Brexit to have a larger negative impact on the economy. The Bank’s forecasts are predicated on a “smooth adjustment” of the UK economy to leaving the EU. | |
| However, the Bank itself stressed again that it sees concerns about Brexit weighing on firms’ investment plans, suppressing overall growth relative to where it would otherwise be. And Mr Carney recently estimated that the UK economy is around 1 per cent smaller than expected before the referendum vote and that this will rise to a relative loss of around 2 per cent by the end of 2018. | |
| “Since the referendum on EU membership, UK GDP growth has slowed to the bottom of the range of G7 economies, having previously been at the top, and a similar pattern was observable in business investment growth,” the MPC minutes noted. | |
| “That decoupling was also evident in asset prices”. | |
| Nevertheless, inflation is seen by the Bank as having already peaked at around 3.1 per cent, with the impact of the slump in sterling in the wake of the Brexit vote now fading. | |
| The MPC minutes noted the possibility that booming global growth might give the UK a larger than expected boost and that domestic wages could pick up more rapidly than it currently expects. It currently still expects average wage growth to pick up to 3 per cent this year, despite similar forecasts of an uptick frequently being proven wrong in the past. | |
| In its annual review of the UK’s “equilibrium” rate of unemployment - the level of joblessness that the UK economy can tolerate before inflationary pressures build - the Bank cut its estimate from 4.5 per cent to 4.25 per cent, which is roughly where it is today, implying if the rate were to fall lower rates might need to go up faster. | |
| The Bank’s judgement of total “slack” in the economy was unchanged at around 0.25 per cent. It’s judgement of the UK’s potential GDP growth was also unrevised at around 1.5 per cent a year, implying that any expansion above that rate is likely to produce excess inflationary pressure and demand further rate rises. | |
| The Bank’s productivity growth forecast remained pesimistic, expecting growth to pick up to just 1.25 per cent this year and next. These are roughly half the rates seen before the global financial crisis. The Bank has previously said that lower business investment due to the Brexit result will hold back productivity growth. | |