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BoE Forecasts Pave Way for Eventual Rate Hike

Wednesday, 16 Feb 2011 12:29 PM

Revised Bank of England forecasts opened the door on Wednesday for interest rates to rise slowly later this year but Governor Mervyn King told investors not to assume the central bank was in any hurry to pull the trigger.

The Bank's quarterly inflation report suggested market expectations it could start hiking rates towards the middle of this year from a record low 0.5 percent were not too far off the mark, given that inflation is double its two percent target.

However, there are big divisions on the nine-member Monetary Policy Committee (MPC) and King, striking a distinctly more dovish tone, said the outlook for the economy and inflation remained highly uncertain and hard to predict.

"Some people are running ahead of themselves and saying that we are pre-announcing or laying the ground for a rate rise," he said. "That decision has not been taken and won't be taken until we get to the next meeting or the following meeting, or it may be many quarters."

The pound fell and interest rate futures rallied after the report was published as some investors had priced in a more hawkish outlook for monetary policy following data this week which showed inflation shot up to 4 percent in January.

However, most analysts still expect a steady tightening of policy to begin later this year, as long as Britain's fledgling recovery takes root.

A Reuters poll of economists pointed to rates rising to 0.75 percent in the final quarter of the year, with ten out of 50 expecting a move before July.

"There is a strong possibility of a rise in interest rates in the middle part of this year," said James Knightley, economist at ING. "That said, given our concerns on the growth story we still believe that rates will not rise as much as the market anticipates."

Markets have been pricing in a first rate rise in May.

NO HINTS ON TIMING

King rejected fears the BoE could lose credibility if it did not act soon to cool price pressures — an argument often put forward by MPC hawk Andrew Sentance.

Inflation has been above target for a whole year, leading some economists to question the BoE's inflation-fighting zeal.

King said the Bank was bound to raise rates at some point, but only if the economy was strong enough to bear it.

"We're not in the business of futile gestures, we're in the business of trying to make a dispassionate analysis of the balance of risks to inflation in the medium term," he said.

The central bank's February report showed consumer price inflation spiking up to between 4 and 5 percent in the middle of this year before falling back to around 1.7 percent in early 2013, a higher forecast profile than in November.

Those forecasts were based on the assumption that interest rates would rise to 1 percent by the end of this year, hitting 2.1 percent at the end of 2012.

"Under the assumption that Bank rate moves in line with market interest rates ... the chances of inflation being either above or below the target in the medium term are judged to be broadly balanced," the report said.

King himself wrote a letter to the government on Tuesday saying inflation could fall back into line if rates rise as markets predict. But, on Wednesday, he insisted the Bank was in no way endorsing market expectations.

"We're not. We never do," he said.

Minutes of January's policy meeting showed two MPC members voted to raise rates last month, indicating a shift towards a more hawkish stance.

However, there are also those on the MPC who have held a much more dovish view. Minutes from February's meeting will be published next week when the vote could have been even tighter.

The BoE predicted a bumpy ride for the economy this year, with its 2011 forecasts for growth lower than those in its November quarterly forecasts, but it is seen picking up to around 3 percent in the medium term.

That economic uncertainty leads some analysts to believe that markets are too hasty in pricing in an early rate rise, with sharp government spending cuts only beginning to bite.

"On balance, we feel the first rate hike is most likely to come in August," said Hetal Mehta at Daiwa Capital Markets.

© 2017 Thomson/Reuters. All rights reserved.

   
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Revised Bank of England forecasts opened the door on Wednesday for interest rates to rise slowly later this year but Governor Mervyn King told investors not to assume the central bank was in any hurry to pull the trigger. The Bank's quarterly inflation report suggested...
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2011-29-16
Wednesday, 16 Feb 2011 12:29 PM
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