City analysts pushed their forecasts for the first rate rise since 2007 into next year after the Bank revealed that Ian McCafferty, former chief economist at business group the CBI, cast the sole vote for higher rates when the monetary policy committee met on Wednesday.
Andrew Goodwin, of consultancy Oxford Economics, said: “The chances of a 2015 rate rise, which in our opinion were already low, have receded further.”On a day dubbed “Super Thursday”, the Bank broke with tradition to publish the MPC’s August rates decision, the minutes of the meeting, and its quarterly inflation report, alongside Bank governor Mark Carney’s regular press conference.
The new approach is aimed at ending the “drip-feed” of news from Threadneedle Street. Some analysts had expected the Bank to use the flood of information to send a strong signal that the era of ultra-low borrowing costs is coming to an end.
But while Carney himself struck a hawkish tone in his remarks, the Inflation Report downgraded the MPC’s near-term forecasts for inflation, after a renewed drop in global oil prices, and warned of signs that a business hiring spree is fading.
“The near-term outlook for inflation is muted. The falls in energy prices of the past few months will continue to bear down on inflation at least until the middle of next year,” the MPC said in the minutes of its rate-setting meeting.
The Bank now expects inflation to remain at around zero for at least the next two months, before rising to its 2% target at the end of the monetary policy committee’s two-year forecast period. While a rate rise appears more distant, Jane Tully, of the Money Advice Trust, the charity which runs National Debtline, warned mortgage-holders to start preparing themselves.
“Signs that interest rates will not rise until next spring give borrowers a little more time – but we should not take false comfort from this news. There remains only a relatively short window for households to prepare for the impact that higher interest rates will have on their finances,” she said.
Economic growth is expected to be slightly stronger than previously thought, at 0.7% in the third quarter, and 2.6% for this year as a whole, against a 2.5% forecast in May, as cheap energy costs and rising wages support consumer demand.
Carney also stressed that the strong pound in recent months, which tends to bear down on inflation by making imports cheaper, has done some of the MPC’s work for it.
“There’s no question that the persistent strength of sterling is having an influence on policy,” the governor said. Howard Archer, an analyst at consultancy IHS Global Insight, said: “It does appear that the recent falling back in oil prices and sterling’s strength has markedly reduced the MPC’s perceived need to tighten monetary policy in the near term.”.
The MPC appeared to have become more confident about the outlook for productivity, which has remained a bugbear of Britain’s post-crisis recovery.
“Private domestic demand growth in the United Kingdom is expected to remain robust. Household spending has been supported by the boost to real incomes from lower food and energy prices.
Wage growth has picked up as the labour market has tightened and productivity has strengthened,” it said. Nevertheless, a series of factors, including a slowdown in the labour market, persuaded eight of its nine members to stay their hand. McCafferty was joined by fellow external MPC member Martin Weale in voting for a rate rise throughout the second half of 2014, before they withdrew their support for tighter policy in January as inflation plunged.
In the quarterly Inflation Report, the Bank suggested that the rapid growth in jobs – which was one of the proudest boasts of the chancellor, George Osborne, during the recent general election campaign – appeared to be petering out.
“The pace at which unemployment can fall further is likely to be somewhat slower than in the past few years and Bank staff expect unemployment to change little in the next few months,” the report said. However, Carney played down fears that the recovery is unsustainable, because it is too dependent on consumer spending.
He pointed to strong recent growth in business investment, and stressed: “This is not a debt-fuelled consumer recovery … households are consuming out of income.”
Separate news on Thursday, that industrial production expanded at a relatively robust pace of 0.7% in the second quarter of the year, supported the MPC’s relatively upbeat outlook for growth, although manufacturing output declined by 0.3%, underlining the impact of the strong pound on exporters.
Lee Hopley, economist at manufacturers’ body EEF, said: “While parts of manufacturing at least are still on the march, an improved outlook in export markets and oil and gas investment is need to turn a modest growth outlook into something more significant.”
Interest rates have now remained at 0.5% for more than six years, after being slashed at the height of the global financial crisis to contain the recession. In a recent speech, Carney suggested the decision to raise rates could come “around the turn of the year”; but he stressed on Thursday that this was a personal view, not the collective opinion of the MPC.
theguardian.com
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