LONDON: Bank of England Governor Mark Carney this week faces the growing challenge of explaining why the central bank is signalling it is in no rush to raise record low interest rates, even as Britain’s recovery picks up speed.
The BoE is due to give new inflation and growth forecasts and hold a news conference on Wednesday against a backdrop of soaring house prices in many parts of the country and a faster growth rate than any other big rich nation.
The Bank has struggled to give a clear steer about its interest rate outlook since adopting so-called forward guidance as a policy last year, shortly after Carney took over and just as Britain’s economy was kicking into top gear.
The Bank has said it thinks the recovery can carry on without inflation taking off, allowing it to keep interest rates at 0.5 percent for possibly another year to nurse Britain’s economy back to full health.
Central to the argument is the BoE’s belief that companies can squeeze more out of their workers and machines as demand grows, avoiding a surge in wages that could fuel inflation. Helping them has been a fall in price growth to a four-year low. But questions are growing about the assumption that underpins the BoE’s relaxed stance: that productivity will grow on the back of strong demand.
Britain’s surprisingly strong bounce-back has come with a surge in hiring which the BoE did not predict and which shows little sign of cooling.
Shortly before Carney begins his news conference at 0930 GMT on Wednesday, data is expected to show the unemployment rate fell again to 6.8 percent in the three months to March.
Britain’s economy remains a touch smaller than before the financial crisis and wages are only starting to recover ground lost to inflation in recent years. But the pace of the turnaround and speculation that some BoE policymakers may be getting restless about keeping rates on hold will test Carney’s powers of persuasion. “We think there are risks that the (news) conference will reinforce the view that rates could even rise this year,” economists at BNP Paribas said in a note to clients.
Capital Economics, a consultancy, said it was possible that the unity among policymakers on keeping rates unchanged ended at its meeting last week. Minutes of that meeting will be published on May 21.
Economists mostly expect at least one policymaker to break ranks and vote for a rate hike in the coming months.
As expectations grow that the BoE will raise rates ahead of the U.S. Federal Reserve, the pound last week hit its highest level against the dollar in nearly five years. Economists said the Bank will probably signal this week that it is comfortable with the view in markets that rates will start going up in the first three months of 2015 — just before Britain holds national elections in May — a calendar quarter earlier than it suggested at the time of its last forecasts in February. Reuters
