Rate rise depends on economy, not calendar, says Bank of England chief
19 January 2016
Bank of England governor Mark Carney has said policymakers are in no rush to raise interest rates amid a weakened world economy and slowing UK growth.
He said “now is not yet the time” to hike rates from their historic low of 0.5% following turmoil in financial markets as oil prices have plunged and China’s economic slowdown has spooked investors.
In a speech at Queen Mary University of London, Mr Carney said a rise in UK rates will “depend on economic prospects, not the calendar”.
The outlook has changed dramatically since last summer’s prediction that the decision to raise rates would come into sharper relief at the turn of the year, he said.
He added: “The world is weaker and UK growth has slowed.
“Due to the oil price collapse, inflation has fallen further and will likely remain very low for longer.”
He said “unforeseen disturbances” meant the path for interest rates “cannot be preordained”.
“That means we’ll do the right thing at the right time on rates,” he said.
His speech comes after the International Monetary Fund (IMF) once again slashed its global growth forecast, while data from China also showed the country’s economy growing at the weakest pace in 25 years.
The United States last month hiked raised rates for the first time in nearly a decade as America’s economy expanded strongly last year.
But this does not mean the UK will follow suit with a rate rise soon, Mr Carney said.
Britain’s export industry is more exposed to the weakening global economy than America, inflation is lower on these shores and the UK is also undergoing hefty spending cuts as the Government seeks to tackle the deficit, according to Mr Carney.
He said: “Last summer I said the decision as to when to start raising Bank Rate would likely come into sharper relief around the turn of this year.
“Well, the year has turned and, in my view, the decision proved straightforward: now is not yet the time to raise interest rates.”
Financial markets have pushed back their expectations for an interest rate rise until well into 2017 after recent dramatic falls in global equities, which saw around £110 billion wiped off the value of UK blue chips in the first two weeks of the new year.
Rates staying lower for longer is good news for home-owners, but will come as a further blow to savers, who have seen their nest eggs whittled away by record low rates since the 2008 financial crisis.
Tumbling oil prices – to below 28 US dollars a barrel for the first time in nearly 13 years at one stage in recent days – also means the Bank expects the pick-up in inflation to be more gradual than predicted in its November forecast.
Official figures on Tuesday showed inflation edging higher to 0.2% in December, but fell to zero for the whole of 2015 from 1.5% in 2014 in the lowest annual reading since records began and is likely to remain below the Bank’s 2% target until at least next year.
In his speech, Mr Carney added: “Recent developments suggest that the firming in inflationary pressure we had expected will take longer to materialise.”
Mr Carney said policymakers needed to see faster economic growth, higher pay and more core inflation before deciding to increase rates.
“Progress in all three … will increase confidence that the initiation of limited and gradual rate increases will be consistent with returning inflation sustainably to target,” he told the audience at Queen Mary.
He said the UK’s economic growth over 2015 had “disappointed”, averaging 0.5% per quarter against its earlier expectations of 0.7% per quarter.
He added that the outlook for the global economy may weaken further, in particular due to China and other emerging market economies.
Chinese trade had been “strikingly weak” recently, he said, with the UK hit hard by a slump in demand for overseas exports.
British exports to China have dropped by a third in the year to November, he added.
The pound sunk to a seven-year low against the US dollar, to 1.42 dollars, after the speech as Mr Carney pushed back further the prospect of an interest rate hike.
Howard Archer, chief UK and European economist at IHS Global Insight, said: “Given Mark Carney’s cautious tone, and the increased possibility that consumer price index inflation will stay lower for longer due to oil price weakness, limited earnings growth and growth headwinds, it is clear that the Bank of England could well delay acting until very late on in 2016, or even 2017.”
Photo from Frank Augstein / PA Wire