BOE stays cautious on rate-hike timing as inflation outlook cut

Bank of England governor Mark Carney speaks at the bank's quarterly inflation report news conference on Nov 15, 2015.
Bank of England governor Mark Carney speaks at the bank's quarterly inflation report news conference on Nov 15, 2015.PHOTO: BLOOMBERG

LONDON (BLOOMBERG) - The Bank of England trimmed its growth and inflation forecasts for this year and next and indicated it remains on a cautious footing on the timing of the first interest-rate increase.

UK consumer-price growth will remain below 1 per cent - less than half the central bank's target - until the second half of 2016 and there are downside risks to this outlook, it said in London on Thursday. The BOE also said the strong pound will continue to push down on inflation and this effect will only slowly diminish.

While the new forecasts still suggest policy makers will have to begin raising the key rate from a record-low 0.5 per cent earlier than investors predict, officials offset this with a warning about risks from emerging markets and weaker inflation. The Monetary Policy Committee voted 8-1 to keep the benchmark unchanged this week, with the majority saying underlying price pressures "were not strong enough to justify" tightening.

The quarterly Inflation Report shows the BOE continues to edge only very slowly toward what will be its first rate increase since 2007. On the other side of the Atlantic, Federal Reserve Chair Janet Yellen has kept the door open to a US tightening in December, saying a move that month is a "live possibility" if economic data remain strong.

In the UK, the MPC said domestic demand will continue to be supported by cheaper energy and a lower yield curve. Much of the risks to growth emanate from the global backdrop, particularly emerging markets.

The BOE lowered it 2015 and 2016 GDP forecasts - to 2.7 per cent and 2.5 per cent - and raised its 2017 projection to 2.7 per cent.

On inflation, it cut its outlook out to the third quarter of 2017. It sees price growth at 2.1 per cent in the fourth quarter of 2017 and about 2.2 per cent a year later, above the 2 per cent target. Those forecasts are based on investor bets that rate increases won't begin until early 2017 and indicate that tightening will be needed sooner than then. The cut-off point for the report was late October and the yield curve has steepened since then, pricing in a hike by November 2016.

The BOE repeated its argument that much of the deviation of inflation from the goal is due to cheaper energy and a stronger pound. In a letter to Chancellor of the Exchequer George Osborne published alongside the report, BOE Governor Mark Carney said officials are ready to take "whatever action is needed." He also said the MPC aims to get price growth back to the target in "around" two years, a change from previous language of "within" two years.

"Under the central case set out in today's Inflation Report, the MPC judges it more likely than not that Bank Rate will need to increase over the forecast period," Mr Carney said, without providing any additional clues on the timing.

In the minutes of this month's meeting, the MPC said only Ian McCafferty voted for an increase in the benchmark rate, arguing there are upside inflation risks. It added that the committee had a "wide spread of views" on the outlook.

The MPC also offered fresh analysis of how its exit from emergency stimulus might occur, having previously said that gilt sales will only start after a number of rate increases. In its latest judgment, it said the BOE will keep reinvesting maturing gilts and won't sell any QE assets until the benchmark has risen to 2 per cent.