BOE Bullish on U.K. Economy as It Leaves Rates Unchanged--Update
By Paul Hannon
LONDON -- The Bank of England still expects to raise its key interest rate over the coming years, saying Thursday that a slowdown in economic growth during the first three months of the year was likely temporary and probably not as severe as first estimated.
The BOE's stance is in line with that of other leading central banks, which have yet to significantly alter their plans to move monetary policy back toward settings that were considered normal before the financial crisis, despite some unexpected signs of weakening global growth at the start of this year.
"We think momentum in the economy is going to reassert," Gov. Mark Carney said in a news conference, after the central bank left its key interest rate at 0.5%. "If we're right, then the expectation of households and businesses, which is for some modest adjustment of interest rates, will be justified."
Many of Europe's largest economies slowed at the start of the year as an unusually severe blast of cold weather hit factories, construction sites and retail outlets. According to the first estimates of activity from national statistics agencies, the U.K.'s economy was the weakest of the bunch, growing at an annualized rate of just 0.4% in the first quarter, a period in which the Italian economy expanded by 1.2%, the French economy by 1.0%, and the U.S. economy by 2.3%. It was the weakest showing since the end of 2012.
The BOE said some of that weakness was clearly weather related, while information from its network of agents and other sources suggests the economy was stronger than estimated by the U.K.'s statistics agency, and probably expanded by around 1.2%. And although it cut its growth forecast for this year to 1.4% from 1.8% to take account of early weakness, it stuck with its estimates for the second quarter, and subsequent years.
Rate setters acknowledged that there is some uncertainty about exactly what lay behind the first quarter slowdown, and it is one reason why they decided not to proceed with a previously flagged rise in the key interest rate at their meetings this week. But should economic data releases and surveys confirm the economy has bounced back as they expect, it is possible they could raise the key rate as soon as August when they next publish forecasts for growth and inflation.
"Let's see evidence of that before moving," Mr. Carney said.
The BOE continued to stress that any rise in the key rate will be "gradual and limited," probably amounting to one move a year in each of the next three years. Its new forecasts indicate that would be sufficient to bring inflation down to its 2% target by early 2020 from 2.5% in March.
The BOE raised its key interest rate in November, its first such move since 2007. But that only reversed a cut of the same magnitude in August 2016, which was part of the central bank's response to the U.K.'s vote to leave the European Union. That left the key rate at the same level it reached in March 2009, following a series of large cuts as policy makers responded to the global financial crisis.
While it is sticking to its plans to raise its key interest rate, the BOE sounded less confident than it did in February, when it declared that it would have to move "somewhat earlier and to a somewhat great extent than we had thought." That statement led investors to expect a rate rise this week, until weak economic data persuaded them otherwise. BOE watchers cautioned that could happen again.
"Whether or not the BOE actually hike rates or not over the next couple of years is still an open question," said Dean Turner, an economist at UBS Wealth Management. "As always, and as we've seen today, it will depend on how the data unfolds."
The BOE isn't the first leading central bank to encounter unanticipated delays on the path toward normalization. The U.S. Federal Reserve first raised its key interest rate in December 2015, but had to wait for a year before the economic conditions seemed right for a second move. Since then, rate rises have become more regular, with three in 2017 and one so far in 2018. Economists expect to see further rate rises in June and September.
Write to Paul Hannon at [email protected]