In the latest BOE inflation report hearings, Governor Carney and his men emphasized that the British central bank isn’t looking to hike interest rates anytime soon. How come?
1. 7% unemployment a “threshold, not a trigger”
Perhaps one of the main takeaways from Carney’s remarks is that the 7% unemployment target is merely a threshold for considering tighter monetary policy and not an automatic trigger. In other words, BOE policymakers would only start talking about unwinding stimulus once joblessness reaches that level but that they would have to look into other labor components to figure out if a rate hike is warranted.
For now though, Carney seems uneasy about the job market’s prospects, as he mentioned that wage inflation isn’t keeping up with hiring growth. He pointed out that gains in employment won’t be enough to keep consumer spending afloat if salaries remain low.
2. Bean and Broadbent said so!
Other policymakers, such as Bean and Broadbent, also seem to be happy with the current pace of stimulus. In fact, Broadbent thinks that loose monetary policy has had an “undoubtedly positive” impact on overall economic performance. He even went on to say that the BOE is a long way from winding down QE!
MPC member Bean echoed this sentiment in saying that the BOE isn’t planning on selling gilts unless the U.K. economy is on a sustained path to recovery. Bear in mind that most policymakers have assessed the economic recovery as “strong, but not sustained” so far.
3. Downside risks from euro zone and emerging markets
According to Carney, one of the largest challenges to the U.K. economic recovery is the risk stemming from weak growth in the euro zone and emerging economies. As these nations undergo their own set of reforms, Carney predicts that offshore demand will remain subdued.
4. Domestic demand is also weak.
It doesn’t help that domestic growth is also likely to stay weak and might not be enough to make up for the downturn in global demand. For one, there’s a considerable slack in the economy as industrial production is also running below trend. And with the similarly slow pace of income growth, it appears the odds are not in the British economy’s favor when it comes to relying on domestic demand.
Of course this isn’t to say that it’s all gloom and doom in the U.K.! Relatively speaking, the British economy is one of the better performing major economies out there. However, it’s important to manage expectations when it comes to monetary policy forecasts in order to figure out where pound pairs could be headed in the longer run.
Do you agree that a BOE interest rate hike isn’t bound to happen anytime soon? Let us know what you think by voting through the poll below or sharing your insights in the comment box!