Surprise, surprise! In the latest turn of events, BOE Governor Mark Carney decided to shed his hawkish feathers in favor of a more cautious monetary policy bias. How come the BOE is no longer looking to hike rates soon?
1. Unchanged growth and inflation forecasts
Despite the recent pickup in manufacturing over the past couple of months, the central bank decided to keep its 2014 GDP forecast unchanged at 3.4%. As for inflation, BOE policymakers admitted that annual CPI will tread below the 2% target for the next couple of years.
BOE Governor Carney acknowledged that there have been significant improvements in the U.K. economy but that a sustained recovery isn’t guaranteed just yet. “That is an achievement, but not the ultimate goal. The real tournament is just beginning and its prize is a strong, sustained and balanced expansion,” noted Carney as he compared the progress to the country’s qualification in this year’s FIFA World Cup.
2. Inflationary pressures confined to housing sector
A closer look at the components of inflation reports shows that much of the upward price pressures are coming from the housing sector. After all, house prices have jumped by around 10% over the past 12 months, prompting many to worry about a property price bubble.
Carney addressed this concern by saying that monetary policy isn’t the only available tool that can curb housing inflation. He pointed out that the U.K. government could opt to scale back the “Help to Buy” scheme or tighten lending requirements on mortgages. Changing capital requirements for banks is also another option. In short, stronger and wider-scale inflationary pressures would have to be seen before the BOE resorts to tightening monetary policy by hiking rates.
3. Slowdown in hiring?
Another factor that probably influenced Carney’s decision to take a more cautious tone in the latest BOE Inflation Report was the slowdown in hiring. The latest claimant count change data showed a mere 25.1K reduction in unemployment, smaller than the estimated 30.6K decline and the previous month’s 30.6K drop.
Although the U.K. jobless rate still improved from 6.9% to 6.8% – its lowest level in five years – Carney noted that there’s still significant slack in the labor market. He even mentioned that roughly 1.42 million people are working part-time, comprising 17.7% of those employed.
These statements were enough to dash hopes of a BOE rate hike before the U.K. general elections, as Carney previously projected. Analysts project that the first rate hike won’t take place until the second quarter of 2015, assuming that the U.K. economy carries on with its economic recovery.
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