rate hike

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.

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.

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