The Bank of England has decided to lower its prediction for the rate of the United Kingdom ‘s economic growth for the year 2016. Back in November the Bank had said that it was expecting to see 2.5% growth this year but now they have lowered that expectation by 0.3% to 2.2%.
The Bank also released minutes from the most recent meeting on interest rates. The meeting is held by all the members of the interest rates setting committee, which then votes upon whether or not to change the base rate.
The committee voted unanimously, 9-0, for no change to the base rate of interest. Ian McCafferty had been the only one to continuously vote for an increase since August but this time he too voted to keep interest rates at the same record-low that they have been at for years.
Mark Carney, the governor of the Bank of England, said that the decision was an easy one to make given the current economic climate.
“The decision was whether or not to raise interest rates. It was an easy decision not to raise interest rates, now is not the time to be raising interest rates because we haven ‘t had, in my judgement and the judgement of everyone else on the monetary committee, we haven ‘t had sufficient build in domestic cost growth. The economy is using up some slack but there ‘s still a bit more to be done there.”
The recent report that they released also downgraded their predictions for the level of wage growth that they are now expecting to see. The Bank of England now say that they think the level of average weekly earning will go up by 3% this year. This is 0.75% lower than the level of 3.75% that they previously predicted three months ago.
Kamal Ahmed is the economics editor at the BBC, he says that it will take as long as 2018 before the Bank starts to see the wage growth that they are hoping for.
“The Bank said that persistent low inflation, increases in population and therefore labour supply and changes in taxes meant that it was unlikely that incomes would increase at the rate suggested last autumn.
It said that wage growth had “eased significantly more” than anticipated.
It will be 2018 before average weekly earnings are increasing at the rate experienced before the financial crisis, the Inflation Report suggested.
Nearly a decade after the start of the financial crisis, the feelgood factor is still pretty muted.”
The Bank ‘s report also cut its predictions for the level of growth that it is expecting the economy to see in 2017. They now predict that 2017 will only bring around 2.3% growth as opposed to the 2.6% that they predicted back in November.
An economist from Aberdeen Asset Management, Paul Diggle, said:
“That prodigal first interest rate rise isn’t coming any time soon.
“The Bank of England has made clear that they don’t think growth or inflation is going to do much for a while, so there’s no need to put rates up any time soon.”
In the meeting minutes it can be seen that the group believe that it is “more likely than not” that the base rate of interest will be lifted within the next two years. However, there were also plenty of hints that there is a chance that the Bank may not choose to raise interest rates until well into next year.
Interest rates have been at a record low since March 2009. So long ago in fact that the Monetary Policy Committee does not now have a single member who has ever overseen an interest rates rise. The last member to have done so was Paul Fisher who left in July 2014.
Due to the fact that inflation is still over one percent away from the Bank of England ‘s target of 2%, Mr Carney has now had to write yet another letter to the Chancellor George Osborne. This is now his fifth letter, even though he is only obliged to send one once every three months. In the letter he explained that the reason for the low level of inflation was mainly due to the falling price of oil in the world markets; oil prices fell by around 30% since November.
In his letter Mr Carney said:
“By far the most important reason for below-target inflation remains the sharp falls in energy prices since the middle of 2014. Oil prices have fallen sharply further over the past three months and in December were more than a third lower, in sterling terms, than a year earlier. This has dragged energy price inflation down further. The contribution of fuels and domestic gas and electricity prices to CPI inflation was -0.6 percentage points in December, nearly a percentage point below its pre-crisis average. Food price inflation also remained weak, at -2.9%, reflecting the continued effects of lower input costs and intense competition amongst retailers.”
He went on to say that the “appreciation of sterling” has affected import prices and was having a knock on effect on consumer spending.
“The sterling effective exchange rate index rose by around 15% in the two years to August 2015 and the resulting reduction in import costs is gradually feeding through to consumer prices. This is evident in the fall in the contribution to CPI inflation of other goods prices, beyond food and energy. Overall, these factors can explain the vast majority of the deviation of inflation from the target in December, and a slightly higher proportion than in my previous letter. The remainder reflects subdued domestic cost growth, particularly unit labour costs.”
Carney said at his news conference that there were some good signs for the British economy. One such sign was the fact that the pound has fallen by 3.5% since November. Carney said that that is “the largest decline between inflation reports since the crisis”.
Having a weaker currency means that UK goods are cheaper to export for people purchasing them from overseas. Carney also said that the financial system in the UK was definitely in a good place to deal with any shocks that the turbulent world markets might throw at it. He went on to say that all nine members of the MPC were of the firm belief that the next change to interest rates would see them increase.
He was questioned about his statement last year that the decision to raise interest rates would “come into sharper relief” at the beginning of this year. The governor went on to say that the decision to leave interest rates at the same level was an “easy one”
“Now is not the time to raise interest rates… the economy is using up slack but there is still a bit more to be done there and core inflation, while it’s picked up, hasn’t picked up quite enough.”
Carney continued by saying that he believed it would be possible for the Bank to meet its target for inflation within the next two years. Even though the Consumer Price Index will continue to be affected by falling commodity prices.
“Despite the slightly weaker near-term outlook, the MPC expects inflation to return to the target in around two years’ time. The drags from energy and utility prices, and from the prices of imported non-energy goods and services, are expected to diminish, in the absence of further downside shocks. Also, the MPC’s judgement is that, were Bank Rate to follow the very gradually rising path implied by market yields, the remaining slack in the economy will be used up during 2016 and domestic cost pressures will build.”