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Bank of England plays down interest rate rise speculation Bank of England plays down interest rate rise speculation
(about 4 hours later)
The Bank of England appeared to quash speculation of an early rise in interest rates, leaving its growth and inflation forecasts unchanged. The Bank of England attempted to quash speculation of an early rise in interest rates, signalling the economy is not yet ready for higher borrowing costs.
Policymakers at Threadneedle Street used the Bank's latest quarterly inflation report to signal that it remained in no rush to raise rates, with the first rise expected around the time of the general election in the second quarter of 2015. Bank rate has been on hold at the all-time low of 0.5% since March 2009 and the governor Mark Carney said on Wednesday any rate rises would be "gradual and limited". Policymakers at Threadneedle Street used the Bank's latest quarterly inflation report to stress that it remained in no rush to raise rates, with the first rise expected around the time of the general election in the second quarter of 2015.
The report said it was not yet clear whether the recovery was on a sustainable footing. The forecasts showed members of the rate-setting monetary policy committee still believe there is 1-1.5% of spare capacity in the economy to be used up, following the UK's below-par performance at the onset of the crisis in 2008. Governor Mark Carney said: "We should remember the economy has only just begun to head back to normal. The exact timing of the first adjustment of Bank rate will be a product of the evolution of the economy. Today is not the day."
"At home, the main downside risk is that the pickup in growth proves to be unsustainable, either because productivity and real incomes continue to disappoint, or because business investment does not recover as expected. The view reflected in the May inflation report was at odds with the market expectation that the first rise in rates would come in the first quarter of 2015.
Referring to the May MPC decision to leave rates on hold, the inflation report noted: "The committee judged that there was scope to make further inroads into slack before an increase in Bank rate was necessary." Rob Wood, chief UK economist at Berenberg, said: "Our interpretation is that the rate setters are resisting the data strength as much they can. They seem keen to resist a hike this year.
However, they stressed there was "considerable uncertainty" around the estimate of the amount of slack in the economy, suggesting a range of among committee. "But with growth running strong in their forecast, surveys showing no signs of growth slowing and unemployment close to 6% by the end of 2015, delaying that hike beyond the first quarter of 2015 would be untenable, in our view."
Bank rate has been on hold at the all-time low of 0.5% since March 2009 and Carney said on Wednesday any rate rises would be "gradual and limited".
"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," he said.
"The exact timing will inevitably be the subject of considerable speculation and interest. The ultimate answer will depend on the evolution of the economy, particularly the degree of slack, the prospects for its absorption, and the broader inflation outlook."
The inflation report forecasts showed MPC members still believe there is 1-1.5% of spare capacity in the economy to be used up – unchanged from February – following the UK's below-par performance at the onset of the crisis in 2008.
However, the report also highlighted there was "considerable uncertainty" around the estimate of the amount of slack in the economy, suggesting a range of different views among members of the committee.
Carney said the slack was evident in the 1.4m people who are working part-time because they are unable to find full-time work, and a still relatively high unemployment rate.
He said higher interest rates would not be used in the first instance as a tool to cool the housing market if signs of a housing bubble did begin to emerge. Monetary policy would only be used as "the last line of defence", after the new powers and tools handed to the Bank's Financial Policy Committee (FPC) had been deployed. He also stressed there were limits to what the FPC could achieve.
"What we don't have at the FPC and never will have is the ability to control all aspects of the housing market. We can't perform miracles. The FPC will not build a single one of the [thousands of new] houses that the economy needs. The FPC will not be targeting house prices. What the FPC can do is reduce risks that emanate from the housing market and help mitigate them." The FPC will decide whether or not to use those tools at a meeting next month.
The Bank left its growth forecast for 2014 unchanged at 3.4%, but revised up its forecast for 2015 to 2.9% from its February forecast of 2.7%. Its forecast for 2016 is unchanged at 2.8%.The Bank left its growth forecast for 2014 unchanged at 3.4%, but revised up its forecast for 2015 to 2.9% from its February forecast of 2.7%. Its forecast for 2016 is unchanged at 2.8%.
On the housing market, the MPC suggested that in the first instance it would be up to colleagues on the financial policy committee to deal with potential signs of a bubble. It warned there were risks that the recovery proves to be unsustainable, because productivity and real incomes continue to disappoint, or because business investment does not recover as expected.
"Any potential risks to financial stability emanating from the property market would in the first instance be addressed by the FPC, working with the Financial Conduct Authority and the Prudential Regulation Authority." Risks will be discussed at next month's FPC meeting.
The Bank's policymakers expected the unemployment rate to fall to 6.7% in the first quarter of 2014, from 6.9% in the three months to February. However, data published by the Office for National Statistics on Wednesday showed the actual jobless rate in the three months to March was 6.8%.The Bank's policymakers expected the unemployment rate to fall to 6.7% in the first quarter of 2014, from 6.9% in the three months to February. However, data published by the Office for National Statistics on Wednesday showed the actual jobless rate in the three months to March was 6.8%.
Over the whole forecast period, to early 2017, the Bank is expecting unemployment to fall faster it was predicting in February.Over the whole forecast period, to early 2017, the Bank is expecting unemployment to fall faster it was predicting in February.
By the first quarter of 2017 the jobless rate is expected to be 5.9%, a sharp downgrade from the 6.3% predicted in February.By the first quarter of 2017 the jobless rate is expected to be 5.9%, a sharp downgrade from the 6.3% predicted in February.
The Bank is more optimistic on the growth outlook than the Office for Budget Responsibility, which provides independent forecasts for the Treasury. At the time of the budget in March, the OBR forecast growth of 2.7% this year, 2.3% in 2015, and 2.6% in 2016. The Bank said that although the inflation rate fell to 1.6% in March, it is expected to move closer to the 2% target in the coming months as the falls in petrol prices in the spring of 2013 drop out of the annual comparison.