Here comes the Bank of England

Debra Rodriguez | 13 May, 2017, 09:55

'The pay squeeze we're now experiencing is set to continue throughout the year, resulting in a renewed phase of living standards stagnation over the coming years'. Raising interest rates would help limit inflation but hurt growth by making borrowing more expensive for companies and households.

Michael Saunders, who left Citi to join the Monetary Policy Committee in August, hinted in April he might side with US academic Kristin Forbes, so far the sole supporter on the MPC for raising rates from their current level of 0.25 percent.

The financial market instruments which the Bank of England uses to construct its economic forecasts fully priced in an interest rate rise only in the final three months of 2019, nine months later than in the last set of forecasts in February. Inflation is now expected to peak in Q4 2017 at 2.8%.

The rate-setting Monetary Policy Committee (MPC) predicted real incomes will fall in 2017 as average earnings slow down more than previously thought. Inflation will continue to rise above the 2% target. Inflation has picked up to 2.3%, its highest level in more than three years fuelled by higher oil prices and the pound's sharp drop since the referendum has made imports to the United Kingdom more expensive.

That echoed other forecasters' warnings over falling living standards. The slowdown appears to be concentrated in consumer-facing sectors, partly reflecting the impact of sterling's past depreciation on household income and spending.

"Not yet" is likely to be the main message this week from Bank of England officials pondering when to start signaling an interest rate hike despite a sharp slowdown rekindling doubt about Britain's economy ahead of Brexit.

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Policymaker's used today's update to say that rates may rise sooner than markets think, if the economy grows in line with the forecast.

Markets now expect two rate rises before the end of the decade. On the whole, the Committee judges that, if the economy follows a path broadly consistent with the May central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the very gently rising path implied by the market yield curve underlying the May projections.

"We stick with our view that the economic data will begin to roll over in response to Brexit uncertainty before the MPC gets a chance to raise rates - and that it might be another two years or more before the Bank can tighten", said analysts at Nomura.

The minutes repeated a statement made in May that for those voting to keep interest rates on hold "it would take relatively little further upside news on the prospects for activity or inflation for them to consider that a more immediate reduction in policy support might be warranted". One seat is now empty, reducing it to eight people for this week's decision, after deputy governor Charlotte Hogg resigned when it emerged she had breached the Bank's code of conduct.

The Bank said consumers were beginning to feel the pinch from surging inflation as the pound's plunge since the Brexit vote has pushed up prices.

The MPC noted that both regular and total pay had been weaker than policymakers expected in February.

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Here comes the Bank of England

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