Interest rates could stay put until 2017 as Bank of England sees drag from global economic slowdown

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The Bank of England has forecast that a global economic slowdown will be a major a drag on the UK economy in the coming years, meaning interest rates are likely to stay at their current rock-bottom level well into 2017.

The Bank cut its inflation estimates to 1.1% for the end of 2016, down from 1.5% in August, it revealed in its latest quarterly inflation report.

Moreover, the new Threadneedle Street forecast was predicated on a collapse in market expectations of the pace of rate rises since the summer, meaning that without this stimulus the Bank’s inflation forecast would have fallen even more drastically.

The market turmoil over the summer and the sharp deceleration of the global economy has prompted traders to push back their forecast of the first 0.25% increase in UK rates until the first half of 2017.

In August markets were anticipating rates lift-off in the second half of 2016.

8 to 1

How the¬†Bank of England’s Monetary Policy Committee¬†voted on an interest rate rise

The Bank’s latest forecasts, which show inflation finally returning to the 2% target by 2018, suggest it is comfortable with the latest market assumption on the “more gradual” rate of rate rises.

In a further dovish hint the rate-setting Monetary Policy Committee said there remain “downside risks to this outlook, including that of a more abrupt slowdown in emerging economies”.

The 9 person MPC voted 8 to 1 to keep rates fixed at 0.5%, with Ian McCafferty again the only member pressing for an immediate 0.25% increase in the cost of borrowing.

However, the minutes of the MPC’s meeting also related ” a wide spread of views among members about the outlook for activity and inflation” suggesting some members could yet join McCafferty in the coming months.

The MPC also stressed that “developments might easily turn out differently than assumed, with implications for the global outlook for growth and inflation”.

The Bank shaved its 2016 GDP growth forecast to 2.7%, down from 2.8% previously. It added that it expects the growth rate for the third quarter eventually to revised up to 0.6% from 0.5%. The Bank also expects fourth quarter growth to be 0.6%.

The Bank said that the amount of “slack” in the economy remains around 0.5% of GDP.

Consumer price inflation currently stands at -0.1%.

The MPC said it is unlikely to rise above 1% until the second half of next year due to weak global commodity prices and import costs as well as the dampening effect of sterling.

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November 5, 2015 |
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