News Column

Bank Of England Retains Rate Hike Timing Despite Economic Recovery

May 14, 2014

LONDON (Alliance News) - The Bank of England on Wednesday settled market speculations over an early interest rate hike, saying it was necessary to absorb the slack in the economy before tightening policy rates.

Although the margin of spare capacity has narrowed marginally since February, policymakers see more scope to make greater inroads into slack before raising the interest rate, the bank said in its May Inflation Report.

The amount of spare capacity in the economy remains around 1% to 1.5% of GDP. Regarding the assessment on spare capacity, the bank said the path of slack is uncertain, and there is a range of views on the Monetary Policy Committee.

"For a given growth profile, it will depend heavily on the timing and strength of the rebound in productivity growth," the bank said.

"As time has moved on and the recovery has been sustained, the economy has edged closer to the point at which Bank Rate will need gradually to rise," Governor Mark Carney said at the press conference.

The exact timing will inevitably be the subject of considerable speculation and interest, he said.

When the MPC does start to raise the key rate, it expects to do so only gradually and to a level materially below its pre-crisis average, the bank reiterated today.

Markets started to expect a rate hike this year itself as the unemployment rate declined at a faster-than-expected pace and the economic recovery maintained strong momentum.

Interest rates will remain on hold until the second half of next year, later than the markets and most economists expect, said Samuel Tombs, a UK economist at Capital Economics.

Earlier in August 2013, the bank pledged not to hike interest rate until the jobless rate hit 7%. When unemployment started falling sharply, it widened the scope of forward guidance and assured to maintain status quo until the second quarter of 2015.

IHS Global Insight's Chief UK Economist Howard Archer said the Inflation Report and Carney's remarks provide serious support to the view that interest rates are still most likely to start edging up around next spring.

Archer suspects that a majority of MPC members will be willing to err on the side of caution in raising interest rates so as to give the economy every chance to develop more balanced, sustainable growth.

The bank today maintained its economic growth outlook for this year at 3.4% and estimates 2.9% economic growth next year. Inflation is expected to remain below the 2% target in two years.

But it expects unemployment to fall faster than it estimated in February. The jobless rate is forecast to decline to 5.9% in two years, down from the prior projection of 6.4%.

Data from the Office for National Statistics today showed that the unemployment rate fell to a five-year low of 6.8% in the first quarter of 2013.

David Kern, chief economist at the British Chambers of Commerce said BoE Chief and the MPC have done their best to dampen the growing clamour for immediate interest rate rises in the face of difficult circumstances.

"The current situation, where any good news increases speculation over an early interest rate hike, is hampering businesses' ability to plan future investment," he added.

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Source: Alliance News

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