UK signals that interest rates will finally go up early in 2016
The Bank of England pointed to a possible increase in interest rates early next year, after only one of its top policymakers backed an immediate move and the Bank forecast a slow pick-up in inflation from zero thanks to a strong pound.
Sterling fell sharply and investors briefly pushed back their bets on a first rate hike until June next year, before BoE Governor Mark Carney, inset, said the time was getting closer for the Bank to start undoing its stimulus for Britain's economy.
He also warned markets not to be too relaxed in the path or 'curve' that it predicts for rates. "The market curve does not deliver a sustainable return of inflation to target, because there is an overshoot," Mr Carney told a news conference.
The BoE slashed rates to 0.5pc in the depths of the financial crisis in 2009 and has kept them there ever since. With the economy now recovering strongly and wages finally rising quickly, speculation is growing about when it might decide to start weaning Britain off low rates. The Bank said it expected inflation to be back to target in two years' time. That was in line with its previous forecast, made in May, despite a renewed plunge in oil prices and a strengthening of sterling since then.
But inflation was forecast to rise above 2pc later in 2017, a point Carney stressed as he noted that markets had not priced in a rate rise until late in the second quarter of 2016.
Investors were taken by surprise earlier when the Bank said only one of its nine policymakers had voted for a rate hike at their August meeting, which ended yesterday. Many economists had expected two or even three members of the Monetary Policy Committee to vote for a hike. The 8-1 result prompted markets to push out their bets on a first rate hike.
Only Ian McCafferty voted against the majority. He backed rate hikes last year along with fellow MPC member Martin Weale but they rejoined the fold in January as oil prices tumbled.
As Carney spoke yesterday, bets on a June 2016 rate hike were reined in, Jason Simpson, a UK rate strategist at Societe Generale. "The message is clear - rates need to rise. Not yet, but they need to go up and every inflation report is one step closer to that." (Reuters)