January 20th, 2016
The governor of the Bank of England, Mark Carney, presented a bleak review of the UK’s economic growth, as he confirmed that an increase to interest rates is not likely to occur in the near future. While giving a speech in London yesterday, he proposed that weakness was still evident in the economy, largely due to arising and continuing issues in the global economy.
Promptly following the International Monetary Fund’s downgrading forecast for global growth in 2016, Carney confirmed that, “the world is weaker and UK growth has slowed.” Noting the recent collapse in oil markets and the continued struggles of the Chinese markets, he affirmed the view that inflation is increasingly likely to remain near zero this year. During 2015, inflation rose by 0.2%, providing the smallest increase since the 1960’s.
While many economists had forecast a rate increase in the second to third quarter of 2016, Carney’s comments suggest that the soonest a rate rise will occur is likely to be the end of the year or by early 2017. Howard Archer, chief economist for IHS Global Insight, said: “Given Mark Carney’s cautious tone and the increased possibility that consumer prices will stay lower for longer due to oil price weakness, limited earnings growth and growth headwinds, it is clear that the Bank of England could well delay acting until very late on in 2016, or even 2017.”
On the potential for a rate rise, Carney referred to the various factors to be considered, before a raise would be implemented. He said: “Our strategy in achieving the inflation target varies over time and depends on the nature of shocks that are hitting our economy and the risks our economy is facing. At present the MPC is seeking to return inflation to target in around two years and keep it there in absence of further shocks.”
The US Federal Bank chose to raise US interest rates by 0.25 per cent in December 2015, sparking the belief amongst UK economists that interest rates in the UK would soon follow suit. However, caution has prevailed and many economic commentators have warned that the Fed’s decision may not have been the wisest move, at what remains an unstable period for global markets.
In reference to the Fed’s move, Carney said that the UK economy is a different proposition to its American counterpart, and would be damaged more severely by a reduction in demand for exports and financial services. He said: “It has always been the case that, because the economy is subject to unforeseen disturbances, the precise path for the Bank rate cannot be preordained. Further downside risks to the global outlook remain, reflecting the ongoing challenges in China, fragilities in other major emerging market economies and the potential for financial contagion.”
In reaction to the announcement by the BOE, currency traders began selling the pound at $1.42, the lowest level since early 2009 and a 5% reduction against the rate used just a month ago.
Article By: Simon Butler, Senior Mortgage Consultant at Contractor Mortgages Made Easy
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