InvestmentsSep 17 2014

Market View: ‘Slim chance’ of 2014 interest rate hike

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by

Two members of the Bank of England’s Monetary Policy Committee have voted again to raise interest rates this month, according to the minutes from meetings held on 3 and 4 September, as economists dismiss a 2014 interest rate hike.

The MPC’s Martin Weale and Ian McCafferty both voted for a 0.25 per cent increase in the base rate this month, while the remaining seven members voted to continue to hold rates at their record low of 0.5 per cent.

This is the second consecutive month in which the interest rate vote has been split.

The minutes said: “For two members, economic circumstances were sufficient to justify an immediate rise in Bank rate. While CPI inflation was below the target, and was likely to fall further in the near term, this was largely the effect of the exchange rate rise in the first part of the year.”

The rest of the committee stated that upping the base rate would leave the economy vulnerable to future shocks and raise the “vulnerability of highly indebted households”.

Samuel Tombs, senior UK economist at Capital Economics, said the minutes strike a fairly dovish tone.

“The two members wishing to raise interest rates failed to recruit any other members, and the committee pointed to evidence suggesting that the recovery might slow in Q4 and argued that the eurozone’s growing malaise meant that the downside risks to UK growth in the medium term had probably increased.

“What’s more, various passages of the minutes suggest that the committee is placing more emphasis on the current weakness of CPI inflation and pipeline price pressures, than on theoretical estimates of the amount of spare capacity.

“Given that CPI inflation looks set to continue to ease over the rest of this year, the chances of a 2014 rate hike now look slim.”

Scott Corfe, head of macroeconomics at the Centre for Economics and Business Research, agreed adding: “Cebr expects no rate rise until next year. The outlook for inflation is benign, with no significant upward pressures from commodity prices, and the Bank will in all likelihood wait until earnings growth picks up before raising rates.

“Concerns about the global economic environment, with the eurozone struggling to grow, also provide a strong reason to hold off on a rate rise for now.

Ben Brettell, senior economist at Hargreaves Lansdown, commented that the lack of wage growth is the thorn in the side of an otherwise fairly robust recovery.

“While the figures including bonuses have rebounded, this is due to the effect of companies deferring 2013 bonuses falling out of the figures; growth excluding bonuses is flat at 0.7 per cent.”

He stated that productivity is the key to understanding the problem, with weakness in wage growth reflecting subdued productivity growth, which has been hamstrung by a lack of capital investment.

“Wage increases which are not backed up by increased productivity simply result in price inflation and therefore no real wage growth; over the long term improvements in productivity are the only source of improving living standards.”

Mr Brettell added that this does not make the Bank of England’s job easier, however.

“In the absence of inflationary pressures, leaving rates on hold is a fairly straightforward decision, and it is no surprise that MPC members Mr McCafferty and Mr Weale remain alone in calling for an increase to 0.75 per cent.

“With CPI inflation at a five-year low, and set to remain significantly below target well into 2015, I still believe the first move won’t come until after next year’s election.”

Last month, Mark Carney, Bank of England governor, said that ‘normal’ interest rates are unlikely to be higher than those of “yesteryear” and will only hit 2.25 per cent by the first quarter of 2017.

Mr Carney said: “The path of bank rate implied by market yields, and on which this forecast is conditioned, rises by only 15 basis points per quarter and reaches only 2.25 per cent by the end of the forecast period.”