UK Rates Could Hit 1.5% in 3 years

Mark Carney, governor of the Bank of England, could depart Britain at the end of his five-year term leaving interest rates at just 1.5%, according to the Bank’s latest forecasts.

When borrowing costs were slashed to the unprecedented level of 0.5% in the depths of the financial crisis in March 2009, analysts saw it as a short-term emergency measure.

But the latest forecasts from the Bank’s monetary policy committee, published in its quarterly inflation report on Wednesday, backed the City’s expectations that interest rates will start rising only in 2016.

Investors are pricing in rates of just 1.4% by the second quarter of 2018 – though in reality the MPC tends to move in quarter-point steps. The governor is due to return to Canada when his term ends in July of that year.

Howard Archer, UK economist at consultancy IHS Global Insight, said: “The inflation report suggests that interest rates will rise extremely gradually at least through to mid-2018. This is likely to be reinforced now that the Conservatives are set to press ahead with major spending cuts in the next two to three years.”

The MPC downgraded its forecast for UK GDP growth this year from 2.9% to 2.5%. The Bank has also cut its forecast for next year from 2.9% to 2.6%, and for 2017 from 2.7% to 2.4%.

The committee now expects UK growth to recover gradually, with unemployment continuing to fall, and wages and productivity picking up, creating upward pressure on inflation.

via The Guardian

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