The “Old Lady” sends out a subtle warning.

Bank sign financial advisors The Bank of England’s latest quarterly inflation report has hinted that the future path of interest rates may not be quite what the market expects.

Mark Carney, Governor of the Bank of England said-

“On the whole, the Committee judges that, if the economy follows a path broadly consistent with its central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast horizon than the very gently rising path implied by the market yield curve at the time of the forecast.”

Mr Carney, at the presentation of the Bank’s latest quarterly inflation report (QIR). In launching the May QIR, coming just five weeks before the general election, Mr Carney had to be more careful than normal that it did not ruffle any political feathers. Hence his careful words, which translated from central banker speak suggest interest rates might be higher in three years’ time than the 0.5% implied by money market swap rates. This latest QIR also offers a slightly different view from that of its February predecessor in other areas:

The key points

  • For 2017, GDP growth is now forecast to be. 1.9%, down 0.1% from the earlier forecast in response to the disappointing 0.3% first estimate for Q1. The Bank sees a small improvement in 2018 and 2019. Overall result is “broadly as the Committee had expected in February”.
  • As was widely expected, the Bank has nudged up its inflation forecasts: CPI is already 0.3% above target. The Bank now expects inflation to peak at close to 3% in the final quarter of the year and fall very gently thereafter. For the Bank’s three-year forecast period, it will remain above 2%.
  • The overshoot of inflation “is entirely due to the effects of sterling’s depreciation,” which the Bank will not try to counter. At the press conference Mr Carney explained that “For most of the forecast period, the economy is expected to operate with a degree of spare capacity
    [ie slack], justifying that some degree of above-target inflation could be tolerated.”
  • One factor preventing inflation from subsiding rapidly once the Brexit depreciation effects have fallen out of the annual figures is the Bank’s forecast that “wages will rise significantly as the output gap narrows throughout the forecast period and closes by the end”.

What assumptions have been made?

  • In presenting the report Mr Carney said that the Bank’s forecast relied on, amongst other things:

  • “a significant pick-up in wage growth;

  • no further slowing in aggregate demand;

  • the lower level of sterling continuing to boost consumer prices broadly as projected, without adverse consequences for inflation expectations further ahead; and

  • the adjustment to the UK’s new relationship with the EU being smooth.”

Pessimists might feel that there is plenty of scope for at least one of the conditions not to be met.

The remarks on future interest rates were unexpected, but Mr Carney’s track record on the subject suggests that the market may not place too much credence upon them.

How our financial advisors we can help.

To review your financial position why not book a free meeting with one of our expert financial advisors. At the meeting you can find out how we can help.

Meetings with the financial advisors can be arranged at your home or at our offices in Kettering, Stamford, and London. We also have meeting rooms in Northampton, Bedford and Towcester. .

2018-02-21T15:51:34+00:00 May 25th, 2017|Market, News|

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