News

Not banking on rate rises

February 2016
Bank of England

Last week saw the Bank of England (BoE) give its latest missives on the UK economy.  The policy committee members continue to ponder the impact of a difficult global environment on the UK economy, an economy that is one of the most prone to the vagaries of other regions.  The BoE chose to reduce expected growth for this year and tempered near-term inflation expectations again in the face of a falling oil price.

However, given the low level of unemployment, it is the lack of wage growth that is possibly giving policy makers the biggest headache.  In its efforts to achieve its 2% inflation mandate the BoE is trying to influence domestic stimuli, lack of wage growth being the most obvious.  The BoE is less able to control global influences on inflation, such as the oil price or exchange rates.  Much of the current deflationary force is coming from global pressures, such as movements in sterling and low fuel and energy costs, none of which are within the control of the BoE.  However, we expect lack of wage growth to provide downward pressure on domestic inflation for some time and its absence remains a source of concern.

All of this led to the sole supporter of higher interest rates, Ian McCafferty, changing his mind (again).  We have also taken the opportunity to reassess our expectations.  It now looks unlikely that interest rates will rise until late this year, unless we see a rapid change in wage growth and/or a significant jump in the oil price.  This is likely to mean that sterling remains weaker and that low bond yields may persist at least in the near term.


Glossary