At least two, perhaps three, of the nine members of the Bank of England’s interest rate-setting committee are expected to cast their votes for a rate rise.
Confirmed hawks Martin Weale and Ian McCafferty, who voted for rate rises throughout the second half of 2014 before changing their minds as inflation plunged to zero earlier this year, have signalled they could soon be ready to see borrowing costs rise.
David Miles, another independent monetary policy committee member, whose term is about to end, said in a speech last month it was time to start to bring rates back towards normal levels, from their record low of 0.5%.
“The time to start normalisation is soon; that is not something to shrink from,” he said. Miles will be replaced in September by former hedge fund economist Gertjan Vlieghe.
Thursday is a red letter day for Bank-watchers, because its nine-member MPC will announce their August interest rate decision; publish the minutes of the meeting; and present their latest quarterly forecasts for economic growth and inflation.
These three events have previously been held separately; but the bank governor, Mark Carney, has said he wants to end the “drip feed” of news from Threadneedle Street.
Carney, who has signalled that a change in policy could come “around the turn of this year”, will also set out his assessment of the economy on Thursday, at the Bank’s Inflation Report press conference.
Ross Walker, chief UK economist at RBS, said this may give the clearest indication of the MPC’s plans: “The policy discourse relates to the first rate hike of the cycle – and the first bank rate rise since July 2007 – so the BoE will presumably want to prepare the ground for any move to avoid any adverse shock to confidence.
Among other things, this will entail a carefully managed signalling process via the Inflation Report forecasts.”
When interest rates were slashed to 0.5% in March 2009, with the economy reeling from the impact of the global financial crisis, most economists viewed it as an emergency measure that would soon be reversed.
However, the weakness of the UK’s economic recovery, the government’s austerity policies, and a series of global headwinds, including the eurozone debt crisis, have prevented the Bank from withdrawing the stimulus. Some economists are starting to fret that ultra-low rates are distorting markets and encouraging consumers to take on too much debt.
Official figures showing that GDP growth jumped to 0.7% in the second quarter of this year added to evidence that the economy is strengthening. The MPC is not united behind the need to press ahead with rate rises though.
With inflation at zero, Andy Haldane, the Bank’s chief economist, said in a recent interview: “There is no rush to move rates from where they are right now.”
George Buckley, chief UK economist at Deutsche Bank, pointed out that Carney has sought to signal an impending rate rise in the past, before being blown off track by the unexpected weakness of the economy.
“Remember Mr Carney’s June 2014 Mansion House address where he said that ‘there’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced. It could happen sooner than markets currently expect.’
Within three months the financial markets had once again put back expectations of the first hike well into the following year,” Buckley warned.
Gerard Lyons, economic adviser to Boris Johnson, said: “I would suggest the Bank stays on hold – inflation is low and higher rates will impact via a stronger pound, and hit hard many living hand to mouth.”
theguardian.com
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