LONDON – The prospect of an interest rate increase in the U.K. has gotten pushed back further, possibly even to 2017, to the likely relief of homeowners and grief of savers.
Faced with weak inflation and growing uncertainties in the global economy, the Bank of England’s policy group voted 8-1 on Thursday to keep interest rate at a record low of 0.5 per cent and signalled it could take longer than expected to start raising rates.
The policymakers suggested in a quarterly report that even though Britain has one of the fastest-growing developed economies, inflation might stay lower for longer than expected because of the decline in global growth and a further drop in oil prices. Markets reacted with surprise, with the pound weakening.
Carney underscored that when the bank began raising rates, they increases would be not be abrupt.
“We are in a situation where we have resilient domestic demand and, even in the face of global weakness, we still see the need for gradual interest rate rises to bring inflation back to target,” he told reporters at a news conference.
He said it was a “reasonable expectation” that rates may rise at some stage within the next year.
Thursday’s interest rate decision, which came along with minutes and a quarterly forecast on inflation, had been closely watched because Carney had said the end of the year will bring more clarity as to when rates will rise.
“Recent falls in oil and other commodity prices mean that inflation is likely to remain lower than previously expected until late 2017,” the bank said in its quarterly report.
The bank’s Monetary Policy Committee members believe that it was more likely than not that inflation would remain below 1 per cent into the second half of 2016. The bank’s target is for inflation of around 2 per cent.
“Many emerging market economies have slowed markedly and the Committee has downgraded its assessment of their medium-term growth prospects,” the minutes of the meeting showed.
The pound took a beating on the news because a currency tends to weaken when interest rates stay low. It fell a cent against the dollar, to just over 1.53.
“While the MPC continues to signal an inclination towards raising rates, their inflation projections show a bigger overshoot in relation to the 2 per cent target,” said Michael Sawicki, senior economist at Lloyds Bank Commercial Banking.
Bank of England policymaker Ian McCafferty was alone to vote in favour of immediately increasing the key interest rate by a quarter percentage point.
The bank also published its quarterly inflation forecast, which downgraded its growth outlook slightly to around 2.7 per cent for 2015, down from 2.8 per cent. It also cut it for 2016 to 2.5 per cent from 2.7 per cent.