Wednesday 18 September 2019

UK less likely to hike interest rates early as economists see slack in economy

Mark Carney, governor of the Bank of England
Mark Carney, governor of the Bank of England

and Andre Tartar

Mark Carney's justification for keeping the Bank of England's benchmark interest rate at a record low has the backing of economists, according to a Bloomberg survey.

A majority of 67pc of respondents said there's still enough slack in the British economy to justify holding the key rate at 0.5pc, where it's been since March 2009. The BOE has put spare capacity at about 1pc to 1.5pc of gross domestic product.

As Mr Carney prepares to publish new forecasts in two days and update investors on his views, the level of slack remains a pivotal issue. Conflicting signals from wage and employment data are dividing the Monetary Policy Committee over how the pick-up in the economy will feed through to inflation and when rate increases need to start.

"The degree of labour-market slack evident from wage data suggests that there is no immediate rush to move rates higher," said Peter Dixon, an economist at Commerzbank in London.

"Given the uncertainties surrounding estimates of potential GDP growth, there are very wide confidence intervals around" spare capacity estimates.

Eleven of 21 economists in the Bloomberg survey agree with the BOE's assessment that slack in the economy is within its estimated range.

Nine said it's less than 1pc, and one said it was more than 1.5pc of GDP.

Mr Carney said last month that while there may be more labour supply than previously thought, "it's also true that spare capacity is being used up a bit more rapidly than we had expected".

Short-sterling futures indicate investors are scaling back expectations of an increase in borrowing costs this year. The implied yield on contracts expiring in December has fallen to 0.78pc from 0.83 pc a month ago. The yield on the March 2015 contract is at 0.99pc.

Irish Independent

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