Interest in rate rise

BANK OF ENGLAND DECISION WILL AFFECT MORTGAGE PAYMENTS

THE Bank of England (BoE) will be look­ing to see if Britain’s economy has re­covered from a severe winter chill as it weighs the prospects for a future inter­est rate rise this week.

BoE governor Mark Carney has said first-quarter weakness looks temporary and he expects rates to rise gradually over the next couple of years, to prevent over­heating at a time of above-target inflation and the lowest unemployment since 1975.

But he has been vague about precise timing. A possible May rate rise was thrown off course by an unusually harsh winter – and a possible underlying slow­down – that led to the economy almost stagnating from January to March.

Patchy growth as Britain prepares to leave the European Union in March next year places the BoE policy in sharp con­trast to the United States, where the Fed­eral Reserve plans to raise rates four times in 2018, and three times in 2019.

A record proportion of the public in a BoE survey last month had no idea what would happen to rates over the coming year, perhaps reflecting Brexit uncertainty as well as BoE indecision.

The BoE will have a chance to offer clarity on Thursday (21), when the Mone­tary Policy Committee (MPC) will publish a statement in the morning. Carney is due to give a major speech later that night.

But many economists expect the central bank to keep hedging its bets. Since its last meeting, inflation has fallen to a one-year low of 2.4 per cent and the April industrial output and construction data were strik­ingly weak.

Two BoE policymakers – Ian McCafferty, whose term ends in August, and Michael Saunders – are expected to stick with their view, held since March, that rates need to go up now.

The rest of the MPC are likely to con­clude that there is little cost in waiting un­til at least August before deciding whether to raise rates, economists say.

Even then, it could find further reason to delay. A change to the Office for National Statistics’ publication schedule means second-quarter GDP data will not be released until after the BoE’s August rate meeting.

Wage growth has been solid if unspec­tacular, and May retail sales were strong, reflecting sunny weather, a royal wedding and a partial easing of the inflation pres­sure that has squeezed British consumer demand since June 2016’s Brexit vote.

“August would be too much of a gamble and (we) see November as the next best opportunity for a hike, assuming data strengthens more than we expect and that Brexit remains free of major disruption,” Barclays economists Fabrice Montagne and Sreekala Kochugovindan said. (Reuters)