The Bank of England rate announcement nearly got lost in the shuffle this week. Yesterday, Governor Carney and his fellow policy makers left both the benchmark rate at +0.5% and the overall size of its bond portfolio at £375b.
With the Fed trying to wind down its bond-buying stimulus, the ECB humming and hawing about implementing QE, Governor Carney at the BoE is expected to keep policy unchanged throughout the remainder of this year.
The UK economy is currently “basking in a spell of rapid growth and low inflation.” Earlier this week the IMF indicated that it expects the UK economy to expand +2.9% this year (less than the BoE’s forecasted rate of +3.4%), outpacing both Germany and US growth. Despite the dip in February’s inflation rate (+1.7% annualized), it is expected to hover close to the BoE’s +2% target throughout the year.
Governor Carney has been rather vocal and adamant that UK rates will remain low, keeping the BoE’s easy-monetary policy intact at least until employment improves further and when the nation’s economy is running to its full potential.
Like any G7 monetary authority, the timing of the first rate hike will be of the utmost importance. If authorities wait too long to tighten, inflation may take off. If they act too quickly, then economic recovery could quickly stall.
Fixed income traders are pricing in the BoE’s first-rate hike during Q1, 2015 – perhaps even six-months before the Fed and certainly much sooner than the ECB. No matter when authorities do decide to tighten, any rate rise is expected to be slow and limited to start.
A change in the BoE’s interest rate guidance last month (originally rates were to begin to tighten when unemployment hit +7%, currently hovering at +7.2%) emphasized that once the +7% has been passed authorities would keep a loose monetary policy at least until the “slack” in the labor market and broader economy has been reduced. To date, UK policy makers seem to have underestimated the “real” strength of the own country’s job market.
Expect going forward a hot debate in reference to the word “slack” – Carney thinks there is more “slack” in the labor market than the MPC’s best estimate.
- Spain Deflation Lower Than Reported Earlier
- UK Chancellor Says Economy Has Proven IMF Wrong
- Putin Pressures West on $2.2 Billion Ukrainian Energy Debt
- Fitch Raises Portugal Rating to Positive
- NATO Says 40,000 Russian Troops Must Withdraw From Ukraine Border
- UK Construction Shrinks in February Weather Blamed
- German Central Banker Reaffirms Deflations Risks Limited
- UK House Prices Could Rise 6% For Five Years
- Greek Bond Sale Had Huge Demand
- IMF Warns Europe About Banking System Threat
- JPMorgan CEO Says US Banks Healthier than European
- UK Trade Deficit Narrows in February
- Greek Bond Auction Welcomes 4 Year Low Yields
- Confidence In Greek Debt High – CNBC Poll
- IMF Cuts Russia Growth Forecast
- Economists Poll Says One in Three Chance of ECB To Start QE
- UK Business Confidence Rises Survey Says
- Ukraine Misses Gazprom Debt Deadline
- UK Manufacturing Grows 1 Percent in January
- IMF Forecasts UK Growth At 2.9 Percent in 2014
- UK GDP Keeps Growing But Population Rise Limits Recovery
- Hungary Prime Minister Reelected
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.