Benign economic indicators push interest rate rise further awayMake Text Bigger
Figures from the Bank of England’s latest inflation report shows a benign environment for any pressure on interest rates. Domestic growth has slowed along with wage inflation and price inflation.
Global growth has also slowed again in the last few months with the US economy undershooting by some margin at only 0.7% for the last quarter with the decision to increase US interest rates now looking like a mistake or a move too early. China recorded the lowest growth levels for 25 years, our major trading partner Europe still stagnating and turbulence in the financial markets.
From Chart 1.1 to the left the market-implied path for Bank Base Rate reaches 1.1% in quarter 1 2019 with no change in the coming year forecast. This trend line is 0.2% lower than it was in the November inflation report.
In Europe the ECB refinancing rate remained the same, but the deposit rate was cut further by 0.1% to minus 0.3% in December. This is to discourage banks from holding onto cash by actually costing them to deposit with the Central Bank. This is an attempt to stimulate the European economy by encouraging lending instead of holding onto reserves.
Consumer Price index inflation increased from -0.1% in September to 0.2% in December (see chart 4.1). This recent increase has mostly been caused by the past effects of falls in the price of oil, food and other commodities dropping out of the annual comparisons. However this increase was still weaker than expected due to a continued fall in oil and food prices.
Underlying core inflation stripping out the effects of the above has increased from 1% to 1.3% with more buoyant demand in the consumer services sectors, but this is still well below the medium term inflation target of 2% due to modest domestic cost growth.
The Bank of England’s Fan Chart 5.2 shows the range of projected inflation predicted up to 2019. The darker the shading the more likely the outcome. This shows little inflationary pressure to increase interest rates against the medium term (2-3 year) target of 2%. Therefore I do not see any need to get excited about potential interest rate rises for some time to come.
Good News for borrowers, but it is not great to see the economic recovery slowing into foreign headwinds.
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