Europe
risks, U.S. caution weigh on chances of British rate rise
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[October 09, 2014]
By William Schomberg
LONDON (Reuters) - The risk of a new
recession in the euro zone and caution from the U.S. Federal Reserve are
weighing on expectations of the timing of a first increase in British
borrowing costs, potentially delaying it.
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The Bank of England, as expected, kept interest rates at a record
low on Thursday, leaving Bank Rate at 0.5 percent, the level at
which it has sat since the worst of the financial crisis
five-and-a-half years ago.
Britain's economy has staged a much stronger than expected recovery
since mid-2013. But a combination of weak pay growth and inflation
below the BoE's 2 percent target has allowed the central bank to
keep rates unchanged.
So far only two of the MPC's nine members have voted for a rate
hike, but expectations have been strong for hike as soon February
next year.
Now British policymakers are casting a nervous eye at the euro zone
and in particular Germany, which this week announced a string of far
weaker than expected economic data.
Adding to the sense that rate rises might come later than recently
thought, the Fed has sounded worried about the impact of the
slowdown in Europe as well as in Asia.
In Britain itself, there are some tentative signs of a cooling. The
British Chambers of Commerce warned on Thursday of a "first alarm
bell" for Britain's rapid economic recovery after firms reported the
weakest export growth in almost two years and a big slowdown in
manufacturing.
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London house prices also fell last month for the first time in more
than three years, and prices nationwide showed their smallest
increase in 15 months.
If sustained, the slowdown could feed into next year's general
election and Conservative Prime Minister David Cameron's bragging
rights over an improved economy.
Investors earlier on Thursday showed they were less convinced that
the BoE would raise interest rates in early 2015.
Short-dated gilt prices rallied along with other major government
bonds and short sterling interest rate futures - <0#FSS:> which are
bets on when interest rates will rise - rose strongly.
"We're leaning more and more towards June, and maybe it'll even be
after that," said Marc Ostwald, a strategist at ADM Investor
Services International, when asked when the BoE might kick off its
long-awaited rate hikes.
BLAME EUROPE
The BoE made no statement alongside its monthly policy announcement,
which included a commitment to maintain at 375 billion pounds
($607.5 billion) the stockpile of assets which it acquired under its
program of government bond purchases.
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Minutes of the MPC's meeting are due to be published in just under
two weeks' time. The minutes of last month's meeting suggested
growing concern at the situation in Europe.
In September, MPC members saw only a modest direct impact of the
euro zone's slowdown, but minutes of their meeting showed they felt
"a prolonged period of poor growth and very low inflation could have
a larger impact if it led once again to uncertainty about the
sustainability of euro-area public and external debt".
Indeed British finance minister George Osborne said on Thursday the
euro zone risked slipping back into crisis.
Data on Tuesday showed German industrial output in August plunged at
its steepest rate since the depths of the financial crisis. The
International Monetary Fund has given a nearly 40 percent
probability that the currency bloc would enter recession over the
next year.
The British economy struggled to grow during 2011 and 2012 when the
euro zone was deep in a debt crisis that threatened to break up the
single currency area.
Economists say the current growth problems in the single currency
area will not deliver as big a hit to Britain. But the European
slowdown is a problem for the British manufacturing sector which
accounts for about 10 percent of the country's total economy.
Data published earlier this week showed British manufacturing edged
up just 0.1 percent between August and July. Surveys have suggested
that problems in the euro zone weighed on the sector more heavily in
September.
(Additional reporting by Andy Bruce Editing by Jeremy Gaunt.)
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