BOE Remains On Course to Raise Interest Rates in 2016

By Jason Douglas 

        LONDON--The Bank of England on Wednesday said it remains on course to raise interest rates in the middle of next year, despite sounding a slightly gloomier note on the U.K. economy.
        In its first forecasts for U.K. growth and inflation since last week's national election, the central bank said that it expects annual inflation to rise back toward its 2% target by early 2017, provided interest rates rise in line with expectations in financial markets.
        Annual inflation was last measured at zero in March, but officials expect price growth to accelerate in the second half of the year as domestic cost pressures build and a recent slide in oil and food prices comes to an end.
        Investors currently expect the BOE to raise its benchmark interest rate from a 300-year low of 0.5% in the middle of 2016, according to overnight rates published in the BOE's quarterly Inflation Report.
        Yet underpinning the central bank's assessment was a more pessimistic picture of the U.K. economy's prospects. The BOE cut its forecasts for growth in the years ahead, and officials signaled they are now less optimistic about the British economy's capacity to produce goods and services following a series of disappointments on productivity growth.
        BOE Governor Mark Carney repeated his mantra that future rises in interest rates are likely to be slow and steady, due to the lingering scars of the 2009 global recession.
        Officials have "long expected that these headwinds will merit not only a more gradual rate of increase in Bank Rate than in previous cycles, but also require levels of Bank Rate to remain below average historical levels for some time to come," Mr. Carney told reporters.
        The BOE said that it expects the U.K economy to expand 2.5% in 2015 and 2.6% in 2016, compared with February forecasts for growth of 2.9% this year and next.
        The central bank said the weaker outlook reflects factors including the recent strength of the pound, a sluggish housing market and poor productivity.
        It added the risk of a disorderly end to Greece's efforts to reach a new deal with its international creditors over repaying billions of euros in financial aid is casting a further pall over the U.K.'s prospects.
        The fresh forecasts come just days after Britons returned Prime Minister David Cameron to power with an overall majority in parliament after five years of coalition government. Mr. Cameron's stewardship of the economy was a central plank of his re-election campaign.
        Central banks around the world are grappling with patchy growth and subdued inflation. In the U.S., the Federal Reserve is expected to raise short-term interest rates later this year. The European Central Bank in March embarked on a program of asset purchases aimed at reviving growth in the 19-nation currency union and returning inflation to its close to 2% annual target.
        Also Wednesday, official data showed the unemployment rate in the U.K. fell in the first quarter to 5.5% from 5.7% in the previous three months, while wage growth ticked up to an annual 2.2%, excluding bonuses.
        Write to Jason Douglas at jason.douglas@wsj.com and Jon Sindreu at jon.sindreu@wsj.com
        (END) Dow Jones Newswires

        May 13, 2015 07:34 ET (11:34 GMT)

#FX
#Forex
#SaleForex
#Raise
#InterestRates