Market expectations of the first rate hike in the UK have again been pushed back as more and more dovish comments ooze out of the Bank of England, reflecting weak inflation and increased global market volatility.
Despite the UK economy striding confidently forward, with growth rates comfortably above the pre-crisis levels since late 2013, significantly weak inflation, both internal and external, and increased volatility spilling over from the emerging markets, have again intensified dovish signals coming out of the chambers of the Old Lady of Threadneedle Street.
Speaking in Jackson Hole on August 29 , the Bank of England (BoE) Governor Mark Carney said that the slowdown in China and the wider Asian markets, and the possibility of further disinflationary pressures being imported to the UK, could increase downside risks to the inflation outlook in Britain. At the same time, though, Carney argued that the Asian volatility and economic deceleration in China should not have any significant material impact on the path of the BoE interest rates, at least for now.
Then came the BoE chief economist and MPC arch dove Andrew Haldane, who said last week that the case for raising UK interest rates in the current environment was "some way from being made." Haldane argued that given the current global headwinds, the balance of risks to UK economic growth and inflation is being "skewed significantly to the downside". If those downside risks were to materialize, there could be a need to loosen rather than tighten monetary policy, he said.
Similarly, the BoE Deputy Governor Ben Broadbent told Reuters this week that he "was not one of those on the brink of voting for higher interest rates," given the subdued labor costs, which he argues have been too weak so far to return inflation back to the official target in the medium term.
Broadbent also said that given the current volatility spilling over from China and the wider emerging markets, it is understandable that market participants have again pushed back their rate hike expectations: "It's an entirely predictable reaction of markets," he said.
Even Martin Weale, an inflation hawk at the BoE's nine-strong rate-setting committee, said last week that rate rises "might have to be reversed somewhat" if "events turn out very differently," referring to an increased level of uncertainty about the events unfolding in Asia and Europe.
At the same time, Weale argued that the central bank should not wait too long to increase the base interest rate as it might overshoot the inflation target of 2% in the medium term. Writing for a local paper on September 13, Weale said that a strong labor market and firming wages "mean that inflation is likely to rise above target in two to three years' time."
"Policy needs to be set with reference to this, rather than the current rate of inflation. As a result, it seems likely to me that the bank rate will need to rise relatively soon," Weale wrote.
BoE policymaker Jon Cunliffe, while noting that rates in the UK were more likely to increase rather than decrease, said that inflation remained very weak despite growth maintaining its steady growth.
"What we're not seeing is price pressure building up in the chain. With that drop in unemployment pre-crisis you would have expected to see pressure on pay much earlier. It didn't come. We've got a lot of disinflationary pressure coming from abroad which is holding inflation around zero," he said while speaking to a local news outlet on September 10.
The rhetoric on the data-dependent policy stance oozing from the chambers of the BoE goes broadly in line with that of the US Federal Reserve (Fed). Despite being dovish and cautious about the global volatility, Fed chair Janet Yellen said on September 17 that most [Fed] officials were still ready to raise rates before the end of the year, even at the next meeting in October."
The BoE kept policy unchanged at its September meeting, and again remained split 8-1 against the rate hike, as Ian McCafferty continued to vote for an immediate increase by 25 basis points. The majority of policymakers saw the downside risks emanating from China, and the wider emerging markets, increasing over the month, but at the same time argued that "it would be premature to draw strong inferences from this month's events for the likely path of activity in the United Kingdom."