Hawkish BoE hints at earlier rate rises

Gladys Abbott
February 10, 2018

Global cues are going to be critical, particularly from the developed economies, because after a subdued economic growth since the meltdown in 2008-09 there are strong headwinds of a turnaround which may push crude oil prices further, that will invariably affect India's economy.

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

The comments were a sign that the bank was turning its sights to tackling price growth over two years rather than three.

The MPC, in its new Inflation Report, marginally revised up the GDP forecast for this year as compared to the earlier forecast released in November.

Rate futures showed investors now saw a almost 70 percent chance of a BoE rate hike in May, up from under 50 percent before Thursday's announcement.

The Bank of England raised interest rates for the first time in a decade in November and said today that it now thought the next hike needed to come a bit more quickly than it thought then.

But it has fared better than most forecasts made at the time of the Brexit vote, and it ended 2017 stronger than the BoE expected.

The Bank of England has stuck to its plan to raise rates gradually, and before today's announcement financial markets were expecting United Kingdom rates to hit 1.2% by early 2021, the BoE noted, something that would suggest two or three rate hikes by then.

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Other major banks are likely to follow suit, raising concerns of de facto rate increases in an economy that is growing at its slowest pace in three years and needs private investment.

He added: "This means that growth in demand is expected to exceed that of supply over 2018-2020 with the result that 'a small margin of excess demand emerges by early 2020 and builds thereafter, ' generating persistent upward pressure on inflation".

This has been done keeping in view the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.

Annual wage growth is expected to pick up to 3% by the end of 2018, in line with previous forecasts.

Sterling jumped by more than a cent against the US dollar, although it later reversed most of that increase. All three of the PMIs - for the services, manufacturing, and construction sectors - have come in worse than expected at the start of the year, with the construction sector in a particularly troubling state.

Nevertheless, BoE governor Mark Carney told reporters today that the Bank is confident in its ability to forecast the direction of the British economy despite the "uncertainty" caused by the "exceptional circumstances" surrounding the Brexit negotiations.

"The economic outlook will continue to evolve". Notwithstanding recent volatility in financial markets, global financial conditions remain supportive. "The Brexit process will twist and turn before it is concluded", Mr Carney said today.

Prime Minister Theresa May wants to clinch a transition deal next month to secure full access for Britain to European Union markets for about two years after it leaves the bloc in March 2019.

Other reports by LeisureTravelAid

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