Bank of England May Go For Early Rate Rise

By Mani
Updated on

Bank of England indicated it might announce an interest rate hike sooner than its original forecast of late 2016.

Bank of England May Go For Early Rate Rise

With the unemployment rate in the U.K. falling faster than anticipated, Jason Douglas, Alex Brittain, and Ainsley Thomson of The Wall Street Journal predict that Bank of England might signal an interest rate hike earlier than anticipated.

Bank of England’s forward guidance

In August, Bank of England’s Governor Mark Carney, in his first quarterly inflation report conference, indicated the Monetary Policy Committee intends not to raise the bank rate from its current level of 0.5% at least until the unemployment rate hits the threshold of 7%.

The forward guidance marked one of the new governor’s first departures from the reign of his predecessor, Mervyn King. The guidance is similar to that issued by the Federal Reserve in the U.S.

The August forward guidance also indicated that until the unemployment threshold is reached, the MPC intends not to reduce the stock of assets purchased and/or financed by the issuance of central bank reserves. The forward guidance noted that linking the bank rate and asset sales to the unemployment threshold would cease to hold if any of the ‘knockouts’ were breached. First, in August the MPC stated that CPI inflation 18 to 24 months forward would be 0.5 percentage points or more above the 2% target. Secondly, the MPC considered the medium-term inflation expectations no longer remained sufficiently well-anchored.

Second half growth would be higher

Interestingly, the minutes to this month’s Monetary Policy Committee meeting revealed that bank staff now estimated that growth in the second half of the year would remain around 0.7% a quarter or a bit stronger than anticipated at the time of the August inflation report.

Though the Bank of England anticipated a growth of 0.5% in the three months to September, and roughly the same in the last quarter of the year, the prediction is that official figures on Friday might show the GDP improving by 0.8% in the third quarter.

Philip Aldrick of The Telegraph reports that with the improved scenario, the Bank of England would make its next official forecast next month, when it now looks sure to revise up its growth forecast again. He concludes that the hint in the MPC’s minutes that rates could be on track to rise sooner than expected would draw the Bank of England in line with the markets, which have been pricing in a first rate rise as early as 2015.

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