Although the Bank of England’s Monetary Policy Committee (MPC) has voted to hold interest rates steady at 0.5 per cent, it has also given strong hints of a hike in May.
The Bank said there had been “few surprises” since its last set of quarterly forecast last month, although it noted that inflation fell by more than it expected to a seven-month low of 2.7% in February.
The BoE raised the base rate for the first time in a decade back in November, taking it up by 25 basis points to 0.50%, citing inflation of 3% and the need to return the consumer price index to the 2% target.
Carney cited a robust global economic recovery and high inflation as the reason for the sooner-than-expected increase.
The Bank of England kept rates steady today but two of its policymakers unexpectedly voted for an immediate rate rise, in a statement that will boost investors’ confidence that borrowing costs will rise in May.
In addition, official data this week showing that British wages growth is catching up with overall inflation has cemented expectations of an interest rate hike to 0.75 percent in May.
Comments from Vlieghe and talk on transition follow Thursday’s Bank of England monetary policy decision, which was seen as providing confirmation that it will raise interest rates for a second time in May but lacking any meaningful signals of what might come after that. Last month the BoE forecast growth of 1.8 percent this year and next – well below Britain’s historic average – and last week government forecasts were gloomier, with Brexit dragging on the outlook.
McCafferty and Saunders said there was “widespread evidence” that spare capacity in the economy was largely used up and that pay growth was on the increase, presenting upside risks to inflation. The firming of shorter-term measures of wage growth in recent quarters and a range of survey indicators suggest pay growth will rise further in response to the tightening labour market.
All this accumulated economic data points to some easing of inflationary pressures following the crushing impact of the Brexit vote and the consequent hammering of the pound, pushing shop food prices higher.
The Organization for Economic Cooperation and Development forecasts annual growth of just 1.3% for the United Kingdom this year-a much weaker pace of growth than that expected in the U.S., Germany, France and Italy. In its February projections, the Bank of England said it expects inflation to remain above target for another year or two, supporting predictions for at least one more rate hike this year.
Ben Brettell, senior economist at Hargreaves Lansdown, says keep the champagne on ice for the moment.
In such exceptional circumstances, the MPC’s remit specifies that the Committee must balance any significant trade-off between the speed at which it intends to return inflation sustainably to the target and the support that monetary policy provides to jobs and activity.
Source: Click Lancashire