Bank of England: interest
rates may need to rise before late 2019
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[May 11, 2017]
By Andy Bruce and David Milliken
(Reuters) - The Bank of England said on Thursday that it may need to
raise interest rates before the late 2019 date that markets had been
expecting, assuming Britain can leave the European Union smoothly in two
With only a month until a national election, the BoE said the short-term
squeeze on households from inflation since June's Brexit vote would be
more severe than it predicted in February, with price growth peaking at
over 2.8 percent late this year.
Britain's economy shrugged off expectations of a recession after last
year's referendum, and chalked up one of the fastest growth rates among
major rich economies.
But official data has soured since the start of the year. Data published
on Thursday showed industrial production disappointed in the first
quarter, and little boost for exporters from the fall in the pound since
the Brexit vote.
Many economists expect tougher times ahead as Prime Minister Theresa May
starts two years of fraught Brexit talks before the country leaves the
European Union at the end of March 2019.
The BoE policymakers said on Thursday they could only do so much to
offset the Brexit hit to the economy.
"Monetary policy cannot prevent either the necessary real adjustment as
the United Kingdom moves towards its new international trading
arrangements or the weaker real income growth that is likely to
accompany that adjustment over the next few years," the Bank said in a
summary of its meeting.
However, the BoE said it expected a pick-up in foreign trade and
investment would offset a shortfall in domestic demand this year, and
then saw a sharp pick-up in hitherto lackluster wage growth as
unemployment fell to its lowest in a generation.
"Monetary policy could need to be tightened by a somewhat greater extent
over the forecast period than the very gently rising path implied by the
market yield curve underlying the May projections," the BoE said on
This could imply the BoE will raise rates for the first time since 2007
just as Britain leaves the EU.
Sterling slipped after the Bank's announcement which some investors had
expected to show a deepening split among policymakers about the need for
higher interest rates now, something that did not materialize.
"The Monetary Policy Committee remained in wait-and-see mode this
month," Confederation of British Industry chief economist Rain
"Any changes to monetary policy are unlikely in the near future,
particularly amid ongoing uncertainty over the impact and outcomes of EU
[to top of second column]
Bank of England Governor Mark Carney leaves after speaking at 2017
Institute of International Finance (IIF) policy summit in
Washington, U.S., April 20, 2017. REUTERS/Yuri Gripas
BOE ASSUMES SMOOTH BREXIT
The financial market instruments which the Bank of England uses to
construct its economic forecasts have fully priced in an interest rate
rise only in the final three months of 2019, nine months later than in
the last set of forecasts in February.
These market assumptions were based on average prices in the two weeks
to May 3. Since then, markets have moved to price an earlier rate hike
by the Bank of England and sterling has strengthened, which should help
to push down on inflation.
The BoE said its latest forecasts assumed "that the adjustment to the
United Kingdom's new relationship with the European Union is smooth".
In February BoE Governor Mark Carney warned of "twists and turns" on the
road to Brexit.
The BoE's Monetary Policy Committee (MPC) voted 7-1 in favor of keeping
interest rates on hold at their record low 0.25 percent this month, as
expected in a Reuters poll of economists.
American academic Kristin Forbes, who leaves the MPC at the end of June,
again voted to raise rates to 0.5 percent and warned that the overshoot
in inflation could become more protracted without tightening policy now.
Echoing language from the last policy meeting in March, the BoE said it
would not take much upside news on growth and inflation for some other
members of the MPC to join Forbes.
The central bank trimmed its forecast of growth this year to 1.9 percent
from 2.0 percent, but nudged up its forecasts for 2018 and 2019 to 1.7
percent and 1.8 percent. Last year Britain's economy grew 1.8 percent.
The BoE said inflation was likely to fall back to 2.16 percent in just
over two years' time - still above the BoE's target - and then pick up
slightly going into 2020. Usually Bank of England inflation forecasts
show inflation falling steadily back to target.
(Editing by Andrew Heavens)
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