BoE Says No Rush to Raise Rates

BoE’s Governor Mark Carney said the central bank is in no rush to raise interest rates, suggesting it will wait until next year to tight monetary policy. While the economy has edged closer to the point at which bank rate will need gradually to rise, policymakers consider there is scope to make further inroads into slack before the first increase in Bank Rate is necessary.

In its May Inflation Report, the central bank said it forecasts GDP to expand 3.4 percent in 2014, the same estimate made in February. It also left inflation estimates unchanged, but said it predicts unemployment to fall at a faster pace: to 6.1 percent in a year and to 5.9 percent in two years. But policymakers still see the level of spare capacity in the economy to be between 1 percent and 1.5 percent of GDP, mentioning 1.4 million people who are working part-time because they are unable to find full time work.

Excerpts from the Inflation Report Opening Remarks by the Governor:

As time has moved on and the recovery has been sustained, the economy has edged closer to the point at which Bank Rate will need gradually to rise. The exact timing will inevitably be the subject of considerable speculation and interest. The ultimate answer will depend on the evolution of the economy, particularly the degree of slack, the prospects for its absorption, and the broader inflation outlook. The MPC will continue to monitor a broad range of indicators including unemployment, participation in the labour market, average hours worked and the extent of involuntary part-time working, surveys of spare capacity in companies, labour productivity, wages and unit labour costs.  

Monetary policy will be set to meet the inflation target over the forecast horizon, while using up wasteful spare capacity, particularly in the labour market. 

The actual path of Bank Rate will depend on economic developments.

When Bank Rate does begin to rise, increases are expected to be gradual and limited, meaning that Bank Rate may need to stay at low levels for some time; 

When the time comes to begin to remove stimulus we will, as documented in a box in the Report, defer sales of assets at least until Bank Rate has reached a level from which it could be cut materially; 

The MPC’s flexibility to maintain extraordinary stimulus for as long as necessary is supported by close coordination with the Financial Policy Committee (FPC), which remains vigilant to any resulting risks to financial stability, including those associated with housing. Having taken initial steps in November, the FPC retains considerable flexibility over a graduated range of tools to manage those risks. 

At its May meeting the MPC judged that there was scope to make further inroads into slack before the first increase in Bank Rate was necessary. Our guidance is giving businesses and households confidence that we won’t take risks with price stability, financial stability, or the incipient expansion. It will promote the recovery in business investment, productivity and real wages that a sustained expansion demands. 

Amidst the excitement that output is close to regaining its pre-crisis level we should not forget that the economy has only just begun to head back towards normal. 

BoE Says No Rush to Raise Rates

BoE | Joana Taborda |
5/14/2014 1:24:43 PM