BLBG: It’s Deja Vu as Carney Holds U.K. Interest Rates
This year is looking a lot like 2014 for Bank of England Governor Mark Carney.
With the outlook dominated by a weak euro-area economy that’s showing few signs of recovery, political risks at home and inflation below the 2 percent target, the Monetary Policy Committee left the benchmark interest rate at 0.5 percent today. Investors see borrowing costs staying at a record low for the rest of the year.
The mix of events is giving the nine-member panel little reason to end almost six years of emergency stimulus. While improving wage growth may support the case of two members who have argued in recent months that a rate increase is needed now, the prospect of another year of weak inflation as oil prices tumble is keeping them in the minority.
“The global backdrop and the euro area don’t exactly look supportive, we’ve got a significant and sustained fiscal tightening coming, and we’ve got a dollop of political risk,” said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London who sees BOE keeping policy unchanged until February 2016. “All of that just gets us to a bit of a policy stalemate. I’m more comfortable with the forecast that U.K. rates are not going to rise this year.”
Strains in the euro zone, Britain’s biggest trading partner, are holding back an economy that is starting to feel the effects of tumbling oil prices. Consumer prices rose an annual 1 percent in November, the least in more than a decade.
ECB Stimulus
In the euro region, European Central Bank President Mario Draghi is moving toward full quantitative easing after consumer prices fell for the first time in more than five years in December.
ECB officials met in Frankfurt yesterday, though they aren’t scheduled to make their first monetary-policy announcement of the year until Jan. 22. The Governing Council has reduced the frequency of its policy-setting meetings, a change Carney is preparing for the BOE.
At home, a general election that’s four months away also provides reason for the BOE to hold fire. Opinion polls show no clear winner, setting the stage for another coalition or a minority administration.
The 53 percent drop in oil prices in the past six months is compounding the inflation slowdown in the U.K. Brent crude fell below $50 a barrel this week for the first time since 2009.
Carney Letter
BOE forecasts published in November show inflation won’t return to its target until 2017. Data next week may show inflation below 1 percent in December, which would force Carney to write his first-ever open letter of explanation to Chancellor of the Exchequer George Osborne.
Interest-rate futures show only 12 basis points of interest-rate tightening is being priced in by November. As recently as August, the market was fully factoring in a 25 basis-point increase by next month.
Like their German counterparts, U.K. government bond yields have also been falling. The two-year yield fell this week to the lowest since October 2013.
Recent surveys show some of the shine has come off of the recovery, and Markit Economics’ Purchasing Managers Indexes suggest economic growth slowed to 0.5 percent in the fourth quarter, which would be the weakest pace in a year.
“For most of the committee, they don’t see the point of rushing and choking off the recovery,” said Alan Clarke, an economist at Scotiabank in London. “Inflation heading close to zero is a sticking point.”
Bright Spots
There are some bright spots. Wage growth has strengthened and is now outpacing inflation for the first time since 2009.
That recovery may help MPC members Martin Weale and Ian McCafferty keep up their dissent. They voted for a quarter-point rate increase between August and December, saying a move is needed to prevent wage increases from feeding price pressures.
“The economy is growing robustly, unemployment is falling quickly and no one is going to delay buying a television because it costs less to fill up a car,” said Rob Wood, an economist at Berenberg Bank in London. “They face absolutely no need to raise interest rates when inflation is heading down towards zero but they will need to be careful about when they start hiking, so it’s not too late.”
To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net
To contact the editors responsible for this story: Fergal O’Brien at fobrien@bloomberg.net Andrew Atkinson
