Bank of England indicates interest rate hikes still far off

AP News
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Posted: Aug 06, 2015 10:10 AM
Bank of England indicates interest rate hikes still far off

LONDON (AP) — The Bank of England appears to be still far from raising interest rates, after its policymakers showed more unanimity than expected Thursday in keeping the key borrowing rate at a record low.

Amid concerns over low inflation and slowing growth in Asia, the Bank of England's policymakers voted 8-1 to leave the rate at 0.5 percent for a 78th consecutive month and opted not to pump more money into the economy.

The near-unanimity surprised investors and analysts, who had expected two or even three policymakers to seek a rate increase. The pound fell sharply on the news, to $1.5482 from $1.5630 earlier. The prospect of a longer period of low interest rates tends to weaken a currency.

Governor Mark Carney said that the Bank of England is "drawing closer" to a rate increase as Britain's economic growth remains among the fastest among advanced economies. But when remains an open question.

"The exact timing of the first move cannot be predicted in advance; it will be the product of economic developments and prospects," he said. "In short, it will be data dependent."

But Thursday's decision suggests that the Monetary Policy Committee believes that moment may be far off — particularly given the low inflation numbers. Carney said inflation's brief dip below zero was "the most striking development in the U.K. in the past year."

Analysts say the report dampens prospects for a rise soon.

"The minutes and inflation forecast emphasize that most members see inflation rising more gradually than they did three months ago," said Daniel Vernazza, an economist at UniCredit Bank. He noted that an appreciation in the value of the pound and lower oil prices are keeping inflation low, more than offsetting a rise in wage growth.

"Given that Carney aims to return inflation to target within two years, the probability of a rate hike later this year has reduced."

Inflation is at zero percent, way below the bank's target of 2 percent, meaning there is little pressure to raise rates — even though the central bank on Thursday upgraded its outlook for economic growth this year to 2.8 percent from 2.5 percent previously.

The decision came on what has been dubbed "Super Thursday," when the bank for the first time releases together the results of the rate-setting meeting, minutes of the discussions and the quarterly inflation forecast. In the past, the minutes of the meeting about interest rate decisions were released two weeks afterward.

However, the bank has decided to release the data all at once in an effort to be more transparent. When Carney took over two years ago, he endeavored to make the bank's decisions more clear with a "forward guidance" policy that was meant to telegraph the thinking of those who set interest rates.

But Carney struggled to make his thinking understood by the public— and at one point he was castigated as being an "unreliable boyfriend" for his conflicting messages. "Forward guidance" was quietly dropped, but the wish for transparency remained.