In his latest testimony, Bank of England (BOE) Governor Mark Carney once again talked about rate hike prospects, citing that the U.K. central bank would be ready to tighten by spring next year. Apparently, he thinks that the economic recovery is already gaining momentum and that wage growth could accelerate soon.
He also pointed out that inflation is on its way to reaching the central bank’s 2% target, which means that the BOE should start thinking about normalizing interest rates. “If interest rates were to follow the path expected by the markets, inflation would settle at around 2% by the end of the forecast and a further 1.2 million jobs would have been created,” he said. “In other words, we would achieve our mandate.”
A quick review of economic data would suggest that the man’s got a point. Prior to the slowdown in the past couple of months, the U.K. economy has been doing pretty well, even outperforming most of its G7 peers earlier in the year. At that time, rising house prices had been putting upward pressure on overall inflation and policymakers had been very confident that economic slack would be absorbed faster than initially anticipated.
In fact, this has prompted BOE Governor Carney to predict that a rate hike might take place before the U.K. general election in May next year and to remind markets that tightening might take place sooner rather than later. BOE minutes back then also showed that policymakers were surprised to find out that forex traders were attaching a low probability of a BOE rate hike for next year.
Later on, a couple of monetary policy committee members even voted to hike interest rates already, yet it seems that traders are no longer buying these hawkish hints. Heck, the pound barely drew any support even when Carney said that they might hike rates in spring 2015!
For one, traders may already be doubting Carney’s credibility after he backpedaled on his rate hike forecasts back in June. After all, the BOE head did acknowledge that the persistent amount of economic slack remains a huge concern, as it currently accounts for roughly 1% of GDP, and that wage growth is still a crucial component of their decision-making. With that, market participants are likely to wait for more signs of an economic pickup before taking Carney’s remarks more seriously.
Apart from that, the possibility of Scotland’s independence is proving to be a major dilemma for the U.K., as traders seem less inclined to buy the pound before the referendum results are out. This could be a game-changer for the economy, as a victory for the pro-independence camp might leave the U.K. with a higher tax burden and political uncertainty – both of which could weigh on growth prospects and erase some of the progress that the BOE has made.
Do you believe that the BOE can be able to hike rates by spring next year? Share your thoughts in our comment box or cast your votes in our poll below!