Forex »

BOE minutes signal low interest rates to persist beyond unemployment threshold

Finances
Share on StockTwits
Published on
www.finances.com
BOE minutes signal low interest rates to persist beyond unemployment threshold

The Bank of England raised eyebrows after officials said interest rates are likely to remain at record lows well after the unemployment rate reaches its target. These thoughts were captured in the minutes of the latest Monetary Policy Committee meetings, where officials brought forward their guidance on unemployment and unanimously agreed to maintain current policy conditions.

The dovish remarks suggest the central bank still sees considerable downside risk to the economy, and will take a cautious approach to recovery. The British economy will face persistent growth headwinds over the next two years, as conditions in regional and global economies continue to normalize. However, the British economy is one of the few bright spots in Europe, and is moving in stark contrast to the neighbouring euro region.

The British economy has expanded for three consecutive quarters; GDP advanced 0.8 percent in the third quarter, the fastest pace in three years. The service economy hit a 16-year high in October, while construction output soared to a six-year high in the same month. The export market continues to drive growth in the manufacturing industry, which hit a 2-year high in September.

The Unemployment Rate

The UK unemployment rate fell to 7.6 percent in the three months to September, edging closer to the BOE’s target of 7 percent. In Contrast, the euro area unemployment rate is at 12.2 percent, a record high. BOE Governor Mark Carney acknowledged improvements in the labour market, and announced the central bank now expects the unemployment rate to reach its target in the third quarter of 2015, almost a full year ahead of the August forecast. In a forecast published this month, the Monetary Policy Committee said the 7 percent threshold could be reached at the end of 2014.

In a press conference last week, Carney acknowledged the revised guidance shouldn’t be seen as a rate-hike trigger. This view was shared among the other members of the MPC, who stressed the need to tread carefully to ensure recovery is sustained.

“There were uncertainties over the durability of the recovery,” according to the minutes of the November MPC meeting. Mid-term inflation expectations and growth projections under the 0.5 percent borrowing rate “underlined there could be a case for not raising bank rate immediately when the 7 percent unemployment threshold was reached.”

The Committee added it would “reassess what it had learned about the nature of the recovery” once the unemployment rate did in fact reach its target. Regardless of when that might occur, the British labour market is showing considerable improvements. In total, 41,700 fewer Britons applied for unemployment benefits in October, according to the UK Office for National Statistics. Employers added 177,000 payrolls in the three months up to September, shifting the employment rate up 0.3 percentage points to 71.8 percent.

UK, Global Outlooks

The Organisation for Economic Cooperation and Development upgraded its forecast for the UK by more than any other advanced industrialized economy. The OECD expects the UK economy to grow 1.4 percent this year and 2.4 percent in 2014, compared to the previous forecast calling for 0.8 percent and 1.5 percent, respectively.

Despite the revised forecast, UK growth will be outpaced by the rest of the world. The global economy will grow 2.7 percent this year and 3.6 percent in 2014. The Paris-based organization previously forecasted the global economy to expand 3.1 percent this year and 4 percent in 2014. Advanced industrialized economies will continue to diverge from emerging markets, as underlying weaknesses in India and Brazil will strain growth in the developing world. India’s forecast was cut to 3.4 percent this year and 5.7 percent next year—lower than the previous estimates calling for 5.1 percent and 6.6 percent. Brazil’s forecast was cut from 2.9 percent to 2.5 percent in 2013 and from 3.5 percent to 2.2 percent next year.

The neighbouring euro area will contract 0.4 percent this year and return to growth in 2014, according to the OECD. The outlook on the US economy was relatively unchanged from the previous iteration.

Fed, ECB

Earlier this week Federal Reserve Chairman Ben Bernanke made a similar pledge as the BOE, signalling the Fed will likely keep interest rates favourable long after quantitative easing is over. The Fed opted to maintain the $85 billion pace of monthly bond buying in October, and will likely continue to do so well into next year. Incoming Fed Chair Janet Yellen won’t rush to reign in record stimulus, which has injected nearly $4 trillion into the US financial markets since November 2008.

Less than two weeks after the European Central Bank unexpectedly slashed interest rates, policymakers are considering negative deposit rates to help kick-start the stagnating euro area. If the ECB decides to implement this unconventional tool, it would reduce the rate for lenders who deposit excess cash at the central bank to -0.1 percent. A negative deposit rate could potentially boost inflation, which fell to a four-year low in October. However, unconventional policy tools carry unconventional risks, and the move threatens to put the euro area at odds with the German Bundesbank, which has repeatedly argued against looser monetary policy.

Share on StockTwits

What others are reading on Finances

Sorry. No data so far.


Iron FX 1.11156/1.11128 2.8
XM Markets 1.09948/1.09928 2
FxPro 1.10184/1.10171 1.3
FXCM 1.13943/1.13912 3.1