BRITAIN yesterday looked set for its first interest rate hike since the crisis started after the Bank of England turned off the taps on its emergency £200bn quantitative easing programme.
The Bank chose to suspend quantitative easing and kept interest rates at 0.5 per cent.
The monetary policy committee (MPC) judged that the current stimulus in the economy was at an appropriate level in spite of sluggish growth, impaired credit markets and the possibility of another rise in the unemployment rate.
“The Committee will continue to monitor the appropriate scale of the asset purchase programme and further purchases would be made should the outlook warrant them,” the central bank said in a statement.
Most economists now expect that stronger than expected inflation will prompt a rapid hike in rates, with a number of analysts pencilling in a rate rise as early as May.
However, some City economists interpreted the MPC’s pause and accompanying statement as dovish in tone and said forecasts of an interest rate rise in the second half of 2010 may well be pushed back.
But Barclays Capital’s Simon Hayes forecasts that rates will need to be ramped up from 2011 onwards in order to keep inflation under control but also predicts that the economy will only grow an annual 1.8 per cent in 2015, a full percentage point less than its pre-crisis pace. The Bank is expected to cut its growth forecasts shortly.
“The inflation data will prompt a fairly rapid turnaround to MPC tightening [rising bank rate and gilt sales] in coming months, especially if inflation expectations surge and the UK continues to lack a credible programme to return to a sustainable fiscal path.”
“Price pressures will remain muted with the consumer price index close to the two per cent target. This would be consistent with the MPC starting to raise rates, tentatively, during the second half of 2010. We expect rates to be getting close to neutral – around five per cent – by late 2013 or early 2014.”
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“The recovery is still at a delicate stage and, after some short-term volatility, we expect inflation to drop below target for a prolonged period. With fiscal tightening ahead, we expect interest rates to remain at 0.5 per cent until early 2011, by which time the recovery should be on a firmer footing."