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Bank of England to refrain from rate hike until August 2020 – NIESR

The Bank of England is likely to keep interest rates on hold until August 2020 because of a slower global economy and prolonged uncertainty about Brexit, a leading think tank said on Thursday.

The National Institute of Economic and Social Research pushed back by a year its previous forecast of a BoE rate hike which it made as recently as February.

NIESR economist Garry Young said a weaker global economy, and its knock-in impact on oil prices and other imports, was impacting monetary policy around the world, while in Britain uncertainty about Brexit has also kept the BoE on the sidelines.

“Now we expect the first increase in Bank Rate to be next August rather than this August,” he said.

The weakness in prices of imports would help offset inflation pressure from rising wages at home, Young said.

Britain is facing more uncertainty about its future relationship with the European Union after a deadline for Brexit was delayed from April 12 until the end of October this month.

Last week, a Reuters poll showed most economists now expect the BoE to raise borrowing costs early next year.

The British central bank has raised rates twice to 0.75 percent from an all-time low of 0.25 percent but Governor Mark Carney said the outlook for the economy is now shrouded in the “fog of Brexit.”

NIESR trimmed its expectation for British economic growth this year to 1.4 percent from its February forecast of 1.5 percent. It expected growth to pick up to 1.6 percent in 2020.

The forecast was based on the assumption of a “soft” Brexit which avoids disruption at the Irish border and maintains a high degree of access to EU markets.

The growth outlook would be slower if Britain ends up in a customs union with the EU, as favoured by the opposition Labour Party, or if the country leaves the EU without a transition deal, NIESR said.

Writing by William Schomberg

Source: UK Reuters

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Bank set to hold rates at 0.75% after August hike

Bank of England policymakers are set to sit tight on interest rates next week after last month’s milestone hike and amid a mixed performance across the economy.

The Monetary Policy Committee (MPC) is expected to vote for no-change, having increased rates to the highest level in nearly a decade last month – to 0.75% from 0.5%.

Governor Mark Carney said in August that rates would need to rise further to bring inflation back to the 2% target over the next few years, though he stressed hikes would be “limited” and “gradual”.

But economists are not expecting another rise any time soon, with increasing anxiety over Brexit negotiations seen as holding back growth.

Mark Carney
Mark Carney told MPs he was willing to stay on for longer to help support Brexit (PA)

Closely-watched industry surveys have pointed to stable growth of 0.4% in the third quarter, but this is thanks to a robust performance among services firms offsetting a dismal showing from the manufacturing and construction sectors.

There had been initial fears the Bank may have acted too soon to raise rates after official figures for the second quarter showed that while growth rebounded overall by 0.4%, expansion stuttered in the final month, with growth of just 0.1% in June.

Howard Archer, chief economic adviser at the EY ITEM Club, said: “The mixed set of August purchasing managers indices reinforce belief that it will be some considerable time before the Bank of England raises interest rates again after August’s hike from 0.50% to 0.75%.

“It looks unlikely that interest rates will rise again until after the UK
leaves the EU in March 2019 given the major uncertainties that are likely to occur in the run-up to the UK’s departure.”

The rates decision comes after Mr Carney effectively confirmed plans to stay on past his current departure date of June 2019 to support the UK through Brexit.

He told MPs on Tuesday he was “willing to do whatever” he can to help promote a smooth Brexit and transition at the top of the Bank.

It followed mounting press speculation over whether he would stay on until 2020.

But questions have since been swirling over the talks between Mr Carney and the Chancellor, with some concerned about the lack of transparency.

Former MPC member Andrew Sentance was reported hitting out at process.

He said: “It seems an awful lot is happening in this appointment process behind the scenes and that is not good in terms of the independence of the Bank of England.”

In the hearing with MPs, Mr Carney and other Bank chiefs also warned over the possibility of significant price hikes in the event of a no deal scenario, which the governor said would send the pound lower.

Inflation appears to be back on the rise already after recent brief respite, rising in July for the first time since November, to 2.5% from 2.4% in June, although this was largely due to higher transport costs.

Source: Shropshire Star

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Bank of England’s latest rate hike under microscope after UK GDP data released

The rebound in second-quarter UK growth was in line with Bank of England forecasts, but economists have raised questions over whether last week’s rate hike was justified.

While figures showed GDP rising 0.4%, economic expansion appeared to sputter in the final month of the quarter, growing just 0.1% in June.

“The second-quarter rebound was in line with expectations from the Bank of England, which raised interest rates for the second time in ten months at its August meeting,” said Chris Williamson, chief business economist at IHS Markit.

“Barring surprises, the Bank sees the economy growing at a steady 0.4% rate in coming quarters, but there are already signs that the third quarter has started on a softer footing,” he added.

He noted that recent purchasing managers’ index (PMI) readings covering the services, manufacturing and construction sectors are pointing to third quarter growth of just 0.3%.

“Not only did the PMI lose ground in July, but recent inflation indicators have fallen, hence fueling criticism that it may have been more appropriate to postpone a rate hike when genuine signs of the economy strengthening had appeared, rather than just a rebound from extreme weather,” he said.

But Howard Archer, chief economic adviser to the EY Item Club, said the reading “will likely be of considerable relief to the Bank of England”, as a weaker outcome would have fuelled criticism of the rate-setting Monetary Policy Committee (MPC).

“The Bank of England will likely see confirmation the economy grew 0.4% quarter on quarter and is back growing essentially in line with its perceived supply-side annual potential growth rate of 1.5% as consistent with its decision to raise interest rates from 0.50% to 0.75%.”

Mr Archer expects the Bank to wait until after the Brexit deadline of March 2019 to hike rates further, “given the major uncertainties that may occur in the run-up to the UK’s departure”.

The Bank of England currently expects full-year growth for 2018 to come in at 1.4%, rising to 1.8% in 2019.

“We expect the Bank of England to next raise interest rates from 0.75% to 1.00% in May 2019,” Mr Archer said.

“We would not rule out a second 25 basis points interest rate hike towards the end of 2019 as the Bank of England looks to gradually normalise monetary policy.

“However, the growth and interest rate forecasts could be blown out of the water if the UK leaves the EU next March with no deal.”


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Bank of England’s rate hike rush criticised as growth outlook drags

The Bank of England’s hawkish talk on a potential interest rate hike is “ill judged”, according to an influential business group, as new data points to continued sluggish growth in the UK economy.

A poll of more than 6,000 firms from the British Chambers of Commerce (BCC) showed that the balance of firms enjoying increased sales picked up slightly in the second quarter, with a balance of 23 per cent of services firms selling more.

However, forward-looking indicators were weaker, with the number of firms who say they plan to invest more falling.

Multiple members of the Bank’s rate-setting monetary policy committee (MPC) – including governor Mark Carney – have argued that firming wage growth will add to inflation in the medium term. Meanwhile, they argue that first-quarter economic weakness was only a temporary blip.

Suren Thiru, the BCC’s head of economics, said economic conditions remain “subdued” ahead of the next MPC meeting on 2 August.

The pick-up in domestic sales suggests growth improved in the second quarter, in line with economists’ expectations, but signs of a sustained upturn are limited amid falling business confidence, the BCC said.

Thiru said: “The Bank of England’s recent rhetoric around raising interest rates continues to look ill judged. With the UK economy seemingly stuck on a low growth path and inflation easing, it would be prudent for the MPC to provide greater monetary stability rather than undermining the UK’s growth prospects further.”

Economists expect GDP growth to rebound to a 0.4 per cent quarterly rate in the second quarter, according to consensus figures collected by the Treasury. In the first quarter growth slumped to 0.2 per cent.

Separate data to be published today by accountant BDO will show that firms’ output continued to grow in June, but at the slowest rate since December 2012.

BDO’s index, which measures UK business output, fell from a reading of 98.58 points in May to 97.29 in June, below the 100 mark which indicates the long-term growth trend but still above the 95 contraction mark. The index is based on data from the Confederation of British Industry, the Bank of England and IHS Markit’s purchasing managers’ indices.

However, at the same time the employment component of the index has hit record heights, tallying with an unemployment rate of 4.2 per cent at a four-decade low.

Source: City A.M.