The Bank of England will raise interest rates in "small, slow increases" Governor Mark Carney has said. Here's the key phrase from the BofE's statement today:
Inflation is close to the [Monetary Policy Committee] MPC’s 2% target and is projected to remain close to the target in the period ahead. As slack has been absorbed, financial market expectations of the date of the first Bank Rate rise have moved forward. But when Bank Rate does begin to rise, the pace of rate increases is expected to be gradual, with rates probably remaining below average historical levels for some time.
Here's Carney's prepared remarks:
Unemployment has fallen sharply and is now expected to drop below 6% by the end of the year and to around 5.5% by the end of the forecast period - a marked reduction relative to our expectations in May.
The MPC expects inflation to remain at, or slightly below, 2%, before reaching the target at the end of the forecast period.
As I said in Glasgow recently, as the economy normalises, Bank Rate will need to start to rise in order to achieve the inflation target.
The problem for observers is that Carney is trying to have it both ways. He is saying that rates will rise, but not giving a timetable, and leaving the door open for a continuation of the extended period in which rates have been set at near zero. Here's a key phrase from his remarks:
But the MPC has no pre-set course. The path of Bank Rate will depend on how the expansion proceeds and how the inflation outlook evolves.
The BofE also increased its forecast of economic growth in the U.K. from 3.4% to 3.5%.
The FTSE 100 is flat on the news, immediately after the announcement.
Oh dear — the man from The Guardian just asked Carney an insulting question, the FT notes:
... from Larry Elliot at the Guardian): Isn't it true that the Bank hasn't got a clue what's going on out there? And anyone planning to take out a mortgage based on your guidance would be foolish to do so?
"Thank you Larry," replies Carney with a grin
Carney was asked by Sky whether he was "slow boiling the inflation frog." The question amused Carney but he stuck to his guns: The BofE will keep it deliberately vague.
Another reporter then accused Carney of being "clueless." (That seems like an unnecessarily rude way to describe the fact that it's genuinely difficult to balance fighting inflation with the need to not cripple the economy by making money more expensive to borrow.)
Carney said the BofE will implement whatever it needs to "regardless of the outcome" of the Scottish vote for independence. Previously, the U.K. government had said Scotland will not be allowed to continue using the pound as its sovereign currency. Here's Carney's statement today:
We'll implement whatever we're asked to implement. We also have responsibility for financial stability in the U.K. and we'll continue to discharge those responsibilities until they change ... regardless of the outcome of the vote on the 18th of September.
The FT has great live blog of the announcement here. It says:
The MPC has revised up its expectation for near-term growth - it expects growth to slow a little later than it thought in May. The MPC also expects unemployment to fall faster than it thought in May, and inflation to remain around the 2 per cent target over the forecast period.
... The path of Bank rate will be gradual, Carney stresses. "Small, slow increases" could help mitigate the risk that higher borrowing costs would derail the economy. Carney also says that even if all the slack in the economy was eliminated overnight, interest rates would not need to be much higher than they are now - because of all the persistent headwinds facing the economy in the wake of the crisis.
Here's HuffPo's Asa Bennett:
BoE MPC's forecast for when interest rates will rise was an 'expectation, not a promise". Well that's clear then.
The economy is growing in Britain, and unemployment is declining. But Germany may put a drag on the economy, according to City AM:
Berenberg Bank’s economists have already cut their forecasts for the Eurozone, projecting just 0.1 per cent growth in each of the next two quarters. Saxo Bank’s Steen Jakobsen also expects just a 0.1 per cent boost or lower, calling the year a “total loss”.