First rate rise expected in early 2016, say experts

22nd April 2015

Members of the Bank of England’s rate-setting committee voted unanimously to keep interest rates on hold at 0.5%, the latest minutes reveal.

Howard Archer, chief UK and European economist at IHS Global Insight explains: “The April Monetary Policy Committee minutes reinforce our belief that the next move in interest rates will be up despite consumer price inflation being 0.0% for a second month running in March and the MPC observing that ‘inflation was likely to turn slightly negative briefly at some point in the coming months’.

“While Bank of England chief economist Andy Haldane has stated that he sees the chances of the next move by the Bank of England being ‘broadly evenly balanced’ between an interest rate cut or hike, he looks pretty isolated in this view. Indeed, MPC members have been out in some force in recent weeks indicating that the next move in interest rates is most likely to be up, including Bank of England governor Mark Carney.”

While there was again a 9-0 vote for unchanged interest rates in April, Archer points out that Martin Weale and Ian McCafferty remain twitchy about keeping interest rates down at 0.50%.

The minutes recorded that “two members regarded this month’s decision as finely balanced”. The April minutes also reported that “all members agreed that it was more likely than not that Bank Rate would rise over the three-year forecast period”.

Archer says that on the growth side, the MPC are more optimistic about growth prospects in the Eurozone, which they note would be beneficial for the UK economy. Indeed, the minutes noted that for some MPC members “the recovery in the euro area was the most significant development on the month.”

For other MPC member, Archer says the improvement in the Eurozone was countered by weaker US and Chinese data, but it was felt that a US slowdown would be short-lived.

The MPC also noted that inflation expectations had shown signs of stabilization after recent weakening. They concluded that the low rate of inflation was unlikely to lead households to delay any expenditure.

Archer says: “On balance, the minutes reinforce our belief that the Bank of England’s next move will be to hike interest rates from 0.50% to 0.75%, most likely around February 2016.

“Any interest rate hike could be delayed if there is prolonged political uncertainty after May’s general election and this has a dampening impact on economic activity, particularly business investment.”

He adds: “We see interest rates rising gradually to 1.50% at the end of 2016 and to 2.50% at the end of 2017. This is based on our expectation that growth will hold up pretty well and that consumer price inflation will get back up to 2.0% by early-2017. Even so, the Bank of England will not raise interest rates aggressively because of a combination of factors including still relatively high consumer debt levels and the potential impact on sterling. ”

Chris Williams, chief executive of Wealth Horizon,says:  “With Consumer Prices Index (CPI) inflation already at zero, it is understandable the MPC’s forecasts would be pointing towards a period of deflation.

“For investors this is mixed news. Falling pricing is not a sign of a healthy economy, and can turn into a serious problem if left unchecked, especially if it happens in a country that is highly-indebted.

“However, it does mean savings pots will stretch further as the cost of goods and services fall. It also means investments look even more attractive, as the returns they are generating will go further as prices fall.”

Kevin Doran, chief investment officer at Brown Shipley, adds:“The strong pound has increased the likelihood of very low consumer price inflation for the foreseeable future, and it may even turn negative in the coming months. Low inflation provides sufficient cover for the Bank to avoid making the much-needed adjustment to rates that is responsible for current asset price inflation. Accordingly, I do not expect interest rates to rise until August or November this year.

“Despite this, however, I believe that borrowing costs have been kept too low for too long. This has led to a huge transfer of wealth from savers to borrowers and, more worryingly, the steady introduction and creep of macroprudential policy from the Bank of England to attempt to ensure financial stability in such a low interest rate environment.”

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