The fate of the wider UK economy – housing, unemployment and business confidence – may be headline news, but for many commentators the spotlight remains firmly on interest rates.
Just yesterday, in a speech in Darlington the Bank’s deputy governor Charlie Bean was widely quoted as telling local businesses that they shouldn’t get “too hung up” about when the first hike will come with concerns about the strength of sterling at centre stage.
Earler risers
In upgrading its growth forecasts for the next two years – from 2.7% to 2.8% in 2014 and from 2.4% to 2.5% in 2015 – the BCC thinks the first official rate rise will come one-quarter earlier than previously forecasted.
Still, this will not be until Q3 2015, when rates may rise to 0.75% before modest 0.25% steps to reach 1.5% by the second half of 2016.
David Kern, the BCC’s chief economist, commented: “The revamped forward guidance policy goes some way to easing business concerns, and the long-term security will encourage them to invest.
“However some MPC members seem to be signalling early interest rate rises. This kind of unhelpful speculation will only prevent business from investing and put pressure on an already strong pound, which could put the recovery at risk.”
It’s a view shared by RLAM’s economist Ian Kernohan, who stresses that with households seeing little if any real income growth, it is unlikely that the Bank of England would want to shock consumers and businesses with a 2014 rate rise, preferring instead to wait until the recovery is more firmly established and GDP is back well above its previous peak.
Still, while the Bank remains relatively tight-lipped about its thinking, there’s speculation that we could see a much earlier hike. Thant Han, portfolio manager at Standish, is one who sees the chances of an interest rate rise by the end of this year as rising.
Above trends
“The general consensus is an early 2015 rise but there is plenty to support earlier action from the Bank of England: from unemployment being down to the Bank’s forward guidance range, the very real prospect of above-trend growth by the end of 2014, to stable inflation – there are positive signs for the UK economy,” he says.
“On the inflation front, a headline rate consistently near or above the Monetary Policy Committee’s target over the rest of this year is likely to create pressure on the MPC to act.”
Meanwhile, there was embarrassment for the Bank of England last week having suspended one of its officials. Read the story here.
