The Bank of England today released a flurry of announcements as part of ëSuper Thursday ‘, which amounted to expressing a gloomy outlook for the global economy, with emerging markets in particular, but a somewhat optimistic outlook for the domestic economy here in the UK.
One of the biggest, though not particular surprising, announcements was that interest rates are being held at their 7-year low of 0.5%, following a vote by 8-1.
Unsurprisingly, it was only Ian McCafferty going against the grain by voting to increase rates to 0.75%. McCafferty ‘s decision was based on the possibility of inflation picking up soon.
The Monetary Policy Committee members also voted unanimously to keep the quantitative easing programme as it is (at £375 billion), saying that they are unlikely to unwind it until interest rates hit 2%.
The Bank maintained, as they have done with each announcement regarding interest rates, that when they eventually do start to increase, they will do so gradually. “This guidance,” they were keen to mention though, “is an expectation, not a promise”. If the City ‘s projections are correct, what will likely happen is that rates will go up to 0.75% sometime around the beginning of 2017.
This announcement comes as one of many, including a prediction that inflation in the UK is likely to also remain below 1% until late next year.
Inflation is currently at 0.1%, well below the government ‘s current target of 2%, something that Mark Carney was forced to explain in a letter to George Osborne. Carney cited a variety of international factors including falling prices for commodities such as metals and oil. The strengthening pound was another factor Carney pointed to as something that was driving down import costs. He also pointed towards slowed wage growth in the UK, though recent reports have shown that in real terms, wages are starting to rise again.
The outlook was generally pessimistic with regards to the global economy, in particular in terms of emerging economies, with the Bank saying that:
“The outlook for global growth has weakened since the August Inflation Report. Many emerging market economies have slowed markedly and the Committee has downgraded its assessment of their medium-term growth prospects.”
However, turning to the domestic UK economy, the outlook was somewhat more positive, at least ostensibly. Despite the pound falling in value by $0.079 as soon as the reports came out, the general consensus does seem to be that here in the UK the economy is, more or less, back on track.
“Domestic momentum remains resilient” said the Bank, “consumer confidence in firm, real income growth this year is expected to be the strongest since the crisis, and investment intentions remain robust.”
The general thrust seems to be that keeping interest rates low will allow policy makers to “insulate the UK economy from their increasingly gloomy global economic outlook”, as BDO LLP accountant Peter Hemington has said.
Financial Times journalist Chris Giles said on Twitter that the Bank ‘s “forecasts see need for lower interest rates to boost household and corporate spending in the face of a weaker global economy.”
Despite conceding that the Bank has been off target with regards to inflation, Mark Carney maintained that increasing robustness in our domestic economy meant that we should be getting closer to being on track relatively soon, hopefully hitting 1% in late 2016. He said that “in the absence of further falls in commodity prices, inflation rates close to zero are unlikely to endure much beyond the end of the year.”
Among commentators, and particularly during the press conference following the Bank ‘s report being released, there is a general feeling that the announcements have been far from earth-shattering.
“Super Thursday has quickly turned into Superfluous Thursday” said Maike Currie of Fidelity International. He was not alone in feeling that the Bank ‘s consistent failure to push up interest rates amounts to little more than excessive caution. Currie spoke of the concerns that savers will have in a low-inflation environment which he described as “a backdrop which typically makes for measly returns.”
Many of those commenting have expressed disappointment as Mark Carney ‘s apparent inability to give straight answers during the press conference when asked questions on topics such as potential dates for an interest rate rise, and the effect that concerns over the US Central Bank ‘s (and other international central banks) rate rise timetable might have had on the BoE ‘s decisions. The general consensus is certainly that Carney and the Bank could have taken a harder line on many things today.
“Caution won out again at the Bank of England today” said James Sproule of the Institute of Directors, “with the Monetary Policy Committee spooked by a worsening outlook for global growth.”
However, while the Bank ‘s “tapdancing” around certain issues may be signs of lack of conviction, their reports on the general increasing robustness in the UK economy do certainly amount to good news, so at least we have that.