The Bank of England has signalled that interest rates could remain on hold until next autumn as inflation is likely to fall below 1% in early 2015.
Plunging commodity prices and weak wage growth against a sluggish backdrop for global growth have triggered a drastic change of view on the outlook for inflation, which is now expected to take three years to return to the Bank’s 2% target.
The Bank’s November inflation report suggests rates will be left on hold at their all-time low of 0.5% until October next year. At the time of the last inflation report, in August, the Bank had been signalling that a pre-election rate rise in February was most likely.
“The near-term profile for inflation was markedly different from that in August, with inflation likely to remain close to 1% over the next 12 months,” the Bank said in the report.
The latest forecasts from Threadneedle Street suggest inflation will fall to 1% in December, and probably be below 1% at some point over the next six months.
That would force the Bank’s governor, Mark Carney, to write a letter to the chancellor, George Osborne, explaining why inflation was more than a percentage point below target.
The expectation that Carney will have to write to Osborne would make a rise in interest rates – on hold since March 2009 – difficult to justify. Markets are likely to be surprised by the tone of the November report, which is more reticent than in recent months.
The Bank left its growth forecast for 2014 unchanged at 3.5%. Policymakers expect the Office for National Statistics to revise up its estimate of third-quarter growth to 0.8% from 0.7%. The Bank then expects growth to slow in the final quarter of this year, to 0.6%.
Growth in 2015 has been revised slightly lower, to 2.9% from the Bank’s August forecast of 3%. The Bank said the housing market outlook was weaker than it was expecting three months ago. It expects unemployment to fall to 5.7% in the fourth quarter of 2015.
However, the Bank said the nature of job creation was weighing on pay growth:
“More recently employment growth has been concentrated among the young and the lower skilled.
These changes in the composition of the workforce are likely to have weighed on the average level of pay in the economy, and therefore reduced average pay growth, in recent quarters.”
theguardian.com
Plunging commodity prices and weak wage growth against a sluggish backdrop for global growth have triggered a drastic change of view on the outlook for inflation, which is now expected to take three years to return to the Bank’s 2% target.
The Bank’s November inflation report suggests rates will be left on hold at their all-time low of 0.5% until October next year. At the time of the last inflation report, in August, the Bank had been signalling that a pre-election rate rise in February was most likely.
“The near-term profile for inflation was markedly different from that in August, with inflation likely to remain close to 1% over the next 12 months,” the Bank said in the report.
The latest forecasts from Threadneedle Street suggest inflation will fall to 1% in December, and probably be below 1% at some point over the next six months.
That would force the Bank’s governor, Mark Carney, to write a letter to the chancellor, George Osborne, explaining why inflation was more than a percentage point below target.
The expectation that Carney will have to write to Osborne would make a rise in interest rates – on hold since March 2009 – difficult to justify. Markets are likely to be surprised by the tone of the November report, which is more reticent than in recent months.
The Bank left its growth forecast for 2014 unchanged at 3.5%. Policymakers expect the Office for National Statistics to revise up its estimate of third-quarter growth to 0.8% from 0.7%. The Bank then expects growth to slow in the final quarter of this year, to 0.6%.
Growth in 2015 has been revised slightly lower, to 2.9% from the Bank’s August forecast of 3%. The Bank said the housing market outlook was weaker than it was expecting three months ago. It expects unemployment to fall to 5.7% in the fourth quarter of 2015.
However, the Bank said the nature of job creation was weighing on pay growth:
“More recently employment growth has been concentrated among the young and the lower skilled.
These changes in the composition of the workforce are likely to have weighed on the average level of pay in the economy, and therefore reduced average pay growth, in recent quarters.”
theguardian.com
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