BOE WATCH: Economists Split On Rates Amid Market Volatility
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LONDON - The Bank of England is less likely to raise its key Bank rate in the near future following turbulence in world financial markets, and fewer economists now believe that a hike is on the cards before the end of the year.
The central bank has increased its policy rate five times since August 2006, to 5.75% from 4.5%, and the BOE’s quarterly Inflation Report, released Aug. 8, led many observers to believe the Bank rate would soon rise to 6.0%.
But sharp moves in financial markets, which could depress U.K. economic growth, have forced analysts to reexamine their views. Minutes from the Monetary Policy Committee’s August meeting that showed a majority of rate-setters had no clear conviction that further action was needed, and a sharp slowing in U.K. consumer price inflation in July, have also given BOE watchers reason to pause for thought.
Of the 12 economists polled by Dow Jones Newswires Monday, half expected rates to be unchanged at 5.75% by year-end, while the other six thought they would rise to 6.0%, most likely in November.
“Overall, a rate hike is looking more difficult after all the turmoil in the financial markets over the past couple of weeks,” said Amit Kara, an economist at UBS. “I still believe, however, that the MPC will stick to their Inflation Report policy outlook, which of course signals one more rate hike, provided financial markets cool down and there is no major spill over into lending costs for households and corporates.”
Forecasts published in the Inflation Report that showed the inflation rate settling at the BOE’s 2.0% target over the medium-term assumed one further rise in the key rate by early next year. Kara tips the BOE to raise the Bank rate one last time in November, having previously expected the move to come in September.
Alan Castle, U.K. economist at Lehman Brothers, also believes an early move has become less likely, while the chances of rates rising to or above 6% and staying there have “diminished significantly.”
But “to the extent that the global economy as a whole holds up, the Committee is likely to remain focused on medium-term upside risks to inflation from capacity and import price pressures,” Castle said.
He still sees a 25-basis-point hike in November as the most probable scenario.
The minority of economists who, even prior to the latest Inflation Report, had tipped the key rate to be unchanged for the rest of this year are feeling even more confident in their calls.
Persistent tightness in financing conditions, amid still fragile investor confidence, strengthen the view that no further hikes are needed, said Lena Komileva, group G7 economist at Tullett Prebon.
“Judging by the FOMC statement and ECB comments on Friday, medium-term growth projections are being revised down — the BOE will make no exception,” Komileva said.
“The impulses from the market this morning suggest that the worst of the speculative credit crisis is now behind us but the correction in market risk premia remains ongoing,” she added, tipping rates to stay at 5.75% into 2008.
Some analysts say that the BOE may cut rates sooner than anticipated. Previously, many had expected rates would not come down until late next year, if at all in 2008.
George Buckley, U.K. economist at Deutsche Bank, expects the next move in rates to be downwards, in the second half of next year. But there is a possibility that the bank rate could fall before then, on account of recent market developments, he said.
“It is important not to assume that in the event of a Fed rate cut the Bank of England would immediately and automatically follow suit,” Buckley said. “This is, however, a fluid situation and conditions could change rapidly enough for our risk scenario to become our central view in a very short space of time.”
Filed by Egor Ouzikov under Exchange Rate Management and Monetary Policy