Bank rates to rise sooner than markets expect: Bank of England governor

2018-02-09 02:25:22 GMT2018-02-09 10:25:22(Beijing Time) Xinhua English

LONDON, Feb. 8 (Xinhua) -- The governor of the Bank of England(BoE) warned on Thursday that interest rates would rise sooner thanmarkets expected.

The warning from governor Mark Carney came as he delivered thequarterly BoE inflation report.

Governor Carney warned markets in a press conference to "expectthat in order to return inflation sustainably to target ... it willprobably be necessary to raise interest rates ... somewhat earlierand to a somewhat greater extent than we had thought inNovember."

At the time of the previous inflation report in November Carneyhad told markets to expect the era of loose monetary policy to beover, as the BoE was considering, in line with the movement's ofthe U.S. Federal Reserve, to further raise the bank rate.

The rate had been at an historic low of 0.25 percent, set inAugust 2016 to counter anticipated headwinds from the Brexit vote,but the bank raised it by 25 basis points in November.

Its forecasts at the time indicated there could be two moreincreases of 0.25 percent over three years.

The rate had returned to 0.5 percent, a level it had previouslyheld since early 2009. The rate rise was the first increase in therate since July 2007.

But Carney's language was ramped up on Thursday, and he alsosaid he had the complete support of the nine-member rate-settingMonetary Policy Committee (MPC).

"The MPC has clearly taken a more hawkish stance," Dr HowardArcher, senior economic adviser with EY ITEM, a London-basedfinancial analysis firm, told Xinhua on Thursday.

"With the economy seemingly now on a firmer footing, borne outby a modest upgrading of the 2018 GDP growth forecast in theInflation Report and slack limited and diminishing, the MPCbelieves there is a reduced case to tolerate above targetinflation.

"Specifically, the minutes observe that if the economy developsas now expected in the February Inflation Report monetary policywould need to be tightened" Archer said.

INFLATION REMAINS ABOVE TARGET

Key to the BoE's rate-decision-making process is inflation, andThursday also saw the release of the quarterly inflationreport.

The BoE's primary economic target is to keep inflation at 2percent, but the report says that the high rate of inflation,currently at 3 percent, could rise a little more and will certainlyremain above the target level in the coming months.

Consumer Price Index (CPI) inflation was 0.5 percent at the timeof the Brexit referendum vote in June 2016, and the surprise voteby Britain to quit the European Union (EU) deeply troubled foreignexchange markets who sent sterling into a sharp downward plungefrom 1.48 U.S. dollars to 1.22 U.S. dollars.

This sharp fall has been good for exporters, as the BoE'sinflation report noted, but has fuelled the steep rise in inflationthrough higher commodity and supply chain costs as well as moreexpensive imports.

The BoE now sees CPI inflation falling back to 2.4 percent byend-2018, 2.2 percent by end-2019 and 2.1 percent by end-2020.Inflation is seen stabilizing at 2.1 percent in the first quarterof 2021.

The inflation report forecasts a modest upgrade in growth fromits November report, up to 1.8 percent increase in GDP growth thisyear and 1.7 percent next year.

But the British economy was structurally reassessed in thereport, and found wanting in productivity, which it is forecastwill now provide an upper limit to growth.

Archer said: "Following a reassessment of the supply side of theeconomy which included lowering its estimate of the equilibriumunemployment rate from 4.5 percent to 4.25 percent, the Bank ofEngland believes that the UK only has a capacity to grow by 1.5percent annually over the forecast horizon period."

He added: "This means that growth in demand is expected toexceed that of supply over 2018-2020 with the result that 'a smallmargin of excess demand emerges by early 2020 and buildsthereafter,' generating persistent upward pressure on inflation."Enditem

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