During its most recent meeting, the Bank of England left its key interest rate unchanged at 0.5%. It has been at this level since March 2009 and seems set to remain anchored to this figure until next summer, based on comments made by the Governor of the Bank of England, Mark Carney.
The Bank has just trimmed its growth forecasts for 2015 and 2016, making an early rate cut less likely. It had previously forecast that UK growth would come in at 2.9% this year, but now expects growth of 2.5%. The original 2016 growth projection was also for 2.9% and this has now been softened to 2.6%. The downgrade is due to concerns about UK productivity following an analysis of job creation which suggests that many newly created positions are for low-skilled workers.
The Bank of England has an inflation target of 2%, but the UK Consumer Price Index (CPI) stands well below this at zero. Mr Carney clearly doesn’t see this as any cause for serious concern and expects it to pick-up towards the end of the year. Low inflation is another reason why an increase in interest rates is unlikely since a traditional reason for raising rates is to generate deflationary pressure on the economy. The Governor suggested that lower energy prices (due to the fall in the crude oil price); a strong Pound and cheaper food prices could be used to account for three quarters of the decline in deflation (presumably, the remaining fraction is due to continuing fragility of global demand which harms UK exports). His crystal ball reveals that inflation will hit, and slightly surpass, the 2% target within two years.
The Bank also expects wages growth to be less pronounced than expected with growth being closer to 2.5% than the 3.5% initially forecast for 2015, but, in any case, significantly above inflation for once.