Thursday 25 December 2014

Bank of England could become first to raise rates this week

Mike Peacock

Published 04/08/2014 | 02:30

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French President Francois Hollande welcomes European Central Bank President Mario Draghi at the Elysee Palace in Paris

After the Federal Reserve recently maintained its path towards raising US interest rates next year, other major central banks will jostle for space on a crowded stage this week.

The European Central Bank, Bank of Japan, Bank of England and the central banks of India and Australia all hold 
meetings. While imminent action is unlikely, the time when policy settings start pointing 
in different directions is nearing.

US growth rebounded in the second quarter and the Fed upgraded its assessment of the economy last Wednesday. It is on course to stop printing money in October but the expectation is that there will be no interest rate rise before mid-2015.

That puts the Bank of England in pole position to be the first major central bank to push rates up from their record low 0.5pc, perhaps before the year is out. Although the UK economy is expanding at an annualised 
clip in excess of 3pc and unemployment is tumbling, the absence of wage pressure means there is no immediate reason to act.

The consensus is that rates will not rise until early 2015 but polling by Reuters found economists expect a first voice or two on the nine-strong Monetary Policy Committee to call for a rate rise this week.

Lack of wage inflation has been a common theme in the United States and euro zone as well, though 
US labour costs recorded their biggest gain in more than 5-and-a-half years in the second quarter.

The Euro-
 
pean Central Bank, which meets on Thursday, faces a very different 
problem to the Bank of England.

Euro zone inflation has slipped further - to just 0.4pc in July - and if it does not start picking up soon, the pressure to start printing money will grow despite strong reservations within the ECB's governing council.

"(The inflation data) don't give any assurance that the euro zone is already out of the deflation danger zone," said Peter Vanden Houte, chief euro zone economist at ING. "Moreover, with the escalating conflict with Russia dampening growth prospects, it seems unlikely that deflation fears will disappear any time soon."

Having cut all its key interest rates in June, the ECB is 
unlikely to act until it has had time to 
judge the impact of those measures.

Irish Independent

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