BOE Signals Rates Will Rise Faster Than Markets Expect -- Update
By Jason Douglas and Paul Hannon
LONDON--The Bank of England joined other major central banks Thursday in signaling that a long era of easy money is gradually drawing to a close, saying that it anticipates raising interest rates in the U.K. at a faster pace than investors currently expect.
The BOE held its benchmark interest rate steady at 0.25% following the conclusion of its August policy meeting, as expected.
Short-term interest rates in financial markets suggest investors expect the BOE to lift its benchmark rate only twice in the next three years, to 0.5% late next year and to 0.75% in mid-2020. But officials said they expect that borrowing costs will need to rise more swiftly to keep inflation in check.
The signal from London comes as accelerating growth in the 19-nation eurozone cements expectations that the European Central Bank will begin to phase out its stimulus measures next year as the region emerges from the shadow of the past decade's financial crisis.
In the U.S., the Federal Reserve remains on course to raise short-term borrowing costs later this year despite some nerves over subdued inflation. Officials are also due to discuss shrinking the central bank's holdings of more than $4 trillion in bonds at their next meeting in September.
A steep decline in the British pound in the wake of last year's Brexit vote has propelled prices in the U.K. sharply higher, squeezing household budgets and restraining consumer spending.
BOE officials said Thursday they expect the effect on prices from the weakened currency to gradually fade but that domestic price pressures--including wage growth--will begin picking up. The central bank forecasts that annual inflation will remain above its 2% target over the next three years if interest rates rise only twice, and the economy grows at the steady but unspectacular pace it predicts.
"If the economy were to follow a path broadly consistent with the August central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the path implied" in financial markets, the BOE said.
Minutes of officials' discussions show that two members of the eight-strong rate-setting panel voted this month for an immediate rise in borrowing costs but were outvoted by a majority that favored staying on hold for now.
Officials voted unanimously to keep the size of the BOE's government and corporate-bond portfolio at GBP445 billion ($558 billion). They also backed a proposal to close in February as planned a special lending facility for banks set up a year earlier to ensure lenders keep the credit spigot open after the Brexit vote. Banks have so far borrowed GBP78 billion in cheap, four-year loans from the facility and are expected to have borrowed around GBP115 billion by the time the program ends--some GBP15 billion more than originally expected.
The BOE said it expects the U.K. economy to expand 1.7% in 2017, a weaker pace than the 1.9% it forecast in May. It also cut its forecast for growth in 2018, to 1.6% from 1.7%. The downgrades reflect weaker forecasts for consumer spending and business investment. Officials expect higher exports to offset some of that softness.
The BOE's forecasts assume the U.K. negotiates a smooth departure from the European Union, expected in March 2019. Officials from both sides are due to meet for fresh talks in October.