The chief economist of the Bank of England calls for an increase in rates, MPC gives a new QE guide

LONDON, (Reuters) – The Bank of England kept rates on hold on Thursday, but its chief economist unexpectedly joined the minority of lawmakers who are calling for a rate hike now, in a move that will bolster expectations of the market of an imminent rise.

PHOTO OF THE ARCHIVE: A pigeon stands in front of the Bank of England in London, Great Britain, on April 9, 2018. REUTERS / Hannah McKay / File Photo

The central bank also established a new guide on when it could Start selling your 435 billion pounds of British government bonds, saying that this could happen once the rates have reached about 1.5 percent, before the previous guide of around 2 percent.

The Monetary Policy Committee voted 6-3 to keep rates at 0.5 percent, where they have been for most of the last decade, in contrast to the expectations of economists in a Reuters poll for a continued division of 7-2.

Chief economist Andy Haldane joined long-time dissenters Michael Saunders and Ian McCafferty in calling for rates to rise to 0.75 percent, due to concerns that recent wage agreements and labor demand could boost wages faster than expected.

This opens the door for a rate increase at the next Bank of England meeting in August, something most economists expected in a Reuters survey but recent market prices saw as a probability of less than 50 percent.

The MPC as a whole said that its earlier view that the weakness of the first quarter was temporary and linked to unusually poor weather seemed "very well on track".

Household spending and confidence recovered strongly, and a sharp drop in factory production in April could reflect that companies accumulated excess inventories during the period of bad weather in the first quarter of the year, the BoE said. .

At the end of last year, Britain was the slowest growing economy among the G7 group of wealthy nations, as companies refrained from investing before Brexit and the high inflation triggered by the 2016 referendum eroded disposable income of households.

Inflation falls from a peak of five years of 3.1 percent reached in November, and growth in the first three months of the year was the slowest since 2012, after the snowstorms worsened the deficiencies in the fifth largest economy in the world.

But with unemployment at its lowest level since 1975, the Bank of England says that the economy is running close to its full capacity, and that the long-term direction for interest rates in the next two or three years will probably increase.

Economists expected the Bank of England to raise rates in May, until a series of weak data and discouraging words from BoE Governor Mark Carney in April overrode those expectations.

Last month, the BoE said it wanted to see signs of stronger growth before preparing to raise rates, in stark contrast to the United States, where the Federal Reserve has raised rates twice this year and plans to do so twice more times.

Policy makers may have been concerned by a survey this week that showed that most unexpected public rates will increase at all this year.

Last month, a separate survey by the Bank of England showed that a record proportion of the public did not know what would happen to rates in the next 12 months, during which Britain will leave the European Union.

Carney will also have ample opportunities to explain the prospects of the economy and his preparation for the Brexit later on Thursday when he gives an important speech before the London financial services industry, scheduled for 2015 GMT.


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