Borrowers Get Holiday Gift of Late 2016 Forecast for Interest Rate Hike
In a recent survey by Markit research group, it was revealed that more than half of households think the Bank of England’s Monetary Policy Committee (MPC) will keep the standard base interest rate steady through the next six months. Economists had thought otherwise, with many considering early next year could be the time when the historically low interest rate level of 0.5% will change for the first time since March 2009. The survey also revealed that households were more optimistic about the next year than in the last six months.
While economists had thought early 2015 would see a rate change, now they are pushing back their expectation of a hike until late 2015 or even early 2016 due to the tone of the MPC minutes.
The minutes from the MPC meeting in December reveals that policy makers were concerned about the falling price of oil. The two members that voted to change the rate, Ian McCafferty and Martin Weale, felt the falling inflation rate warranted an increase. Emerging from the meeting without an increase to the rate has left it unchanged for the 70th month.
Members forecasted that inflation would fall below 1% in December. The target level by the Bank is 2%. Inflation is being impacted by lower food and petrol prices.
For the first time since May 2009, crude oil fell below $59 per barrel on Tuesday. The price has fallen by almost 50% since summer due to weak demand and excess global supply.
Howard Archer, chief economist with IHS Global remarked, “Mark Carney has indicated that the MPC will look through the direct impact of lower oil prices on UK inflation and focus on the medium-term inflation outlook, which will be influenced by wage growth, productivity developments and inflation expectations in addition to how well UK growth holds up.
“Nevertheless, there is obviously the risk that inflation falling more than expected in the near term and staying lower for longer due to weak oil prices will affect inflation expectations.
“We have long forecast the first interest rate hike from 0.50 per cent to 0.75 per cent to come next August, but there is obviously a very real possibility that the Bank of England will hold fire until the fourth quarter of 2015 or even until early 2016.”