Will the Bank of England (BOE) finally raise interest rates after years of hints? Perhaps, but it won’t be this year.
The central bank’s quarterly Inflation Report released Thursday signalled that a rate hike won’t occur this year and the decision will yet again be pushed back to the middle of next year amid falling inflation in the coming months and concerns of economic risks over Greece’s debt worries and the fragile eurozone.
It stated that the official annual inflation rate in the UK will likely reach its two percent target rate in 2017 if interest rates are equal to expectations in the financial markets. The paucity of UK inflation is due to falling oil prices, says the BOE.
Officials added that they are open to the idea of cutting the BOE’s primary interest rate further below its 0.5 percent or even establish a new round of asset acquisitions if economic growth and inflation deteriorates in the United Kingdom, but the central bank didn’t place any hints that it would incorporate any such measures.
“On the downside, the MPC is vigilant to the risks of disappointing global growth or any signs that low inflation begins to affect inflation expectations and wage growth, and therefore becomes self-reinforcing,” stated Carney. “Were these downside risks to materialize, the Committee could adjust the pace and degree of Bank Rate increases, expand the Asset Purchase Facility, or cut Bank Rate further towards zero.”
In an open letter to the Chancellor of the Excheque issued Thursday by BOE Governor Mark Carney, averred that tumbling prices are only “temporary” and a “fundamentally distinct phenomenon from deflation.” He added that declining food and energy prices, which are good for British households, are contributing to weak inflation levels.
“We’re going to have a period where headline inflation is low – very low – for most of this year, and that’s a good thing in general because of the causes of it. It’s not a good thing if it persists though,” said Carney.
Although the BOE is not in a situation where it needs to employ various stimulus tools to spur economic growth, the BOE confirmed that it does have an array of options to consider if it needed to.
“The important point, which is entirely from a contingency or risk-management perspective, is to underscore that if we were in a situation, which we are not in at the moment, but if we ever were in a situation where we needed to provide additional stimulus, we have many options,” said Carney. “The effectiveness of the stimulus is reinforced by the relative health of the financial system as well.”
Carney noted that its monetary policy isn’t lined up with the Federal Reserve, which he believes is a common misconception. He reiterated that BOE monetary policy will not mimic or be right behind the directives being issued by the Fed.
Analysts concluded that the Inflation Report and Carney’s remarks were mostly positive. This allowed the pound sterling to rise close to a seven-year high against the euro. The sterling reached the day’s high of $1.5340 and hit 73.91 pence against the euro.
