Chance of UK rate increase fades amid global uncertainty

LONDON – The likelihood that the Bank of England will raise interest rates in coming months receded on Thursday, after the bank cut its economic forecasts due to the slowdown in global growth and market turmoil.

The Bank of England’s nine-member Monetary Policy Committee unanimously voted to keep the key interest rate at its record low of 0.5 per cent. While in previous months one member had voted for an increase, the unanimous vote indicates greater concerns about the effects on the U.K. of the recent slowdown in the global economy.

“This is one of the most open economies in the world,” Carney said at a press conference. “It has the leading global financial centre housed in it. So international factors, the trajectory of the global economy, global financial conditions, are very important in the U.K. The deterioration in the global outlook has had an impact on our forecast.”

With inflation at 0.2 per cent — far below the 2 per cent target rate — there’s little pressure to raise rates. Some observers have suggested the bank might consider lowering rates, following in Japan’s footsteps.

Carney brushed aside such questions, reiterating that rates were much more likely to be raised than cut.

“The view is that more likely than not the move is up,” he said after presenting the central bank’s quarterly update to economic forecasts, published alongside the policy decision and the minutes to the meeting.

Ruth Miller, U.K. economist for Capital Economics, said the central bank’s report confirmed for investors that a rate hike was “on the back burner.”

“The report seems to have endorsed market expectations that interest rates will stay on hold for the foreseeable future,” she wrote.

In the update, the Bank of England lowered its growth predictions through 2018. The U.K. has enjoyed some of the strongest growth in the developed world, but it is being affected by the global slowdown, upheaval financial markets and uncertainty over the government’s decision to hold a referendum on whether Britain should remain in the European Union.

Carney stressed that even though global financial conditions are tightening, domestic factors are mostly offsetting the troubles. He cited recent stress tests for banks, that checked their ability to deal with a more severe shock to the Chinese economy, higher spikes in market volatility and steeper falls in risky asset prices.

“It is important to recall that major UK banks are well capitalized,” he said, adding that the institutions were “much less likely to amplify such stresses and are likely to be much more able to continue lending to the real economy, even if global conditions were to deteriorate further.”

The bank cut its growth forecasts for the next three years to 2.2 per cent in 2016, 2.4 per cent in 2017 and 2.5 per cent in 2018. In November, it had predicted growth at 2.5 per cent, 2.7 per cent and 2.6 per cent, respectively.