Bank Of England On Course for Rate Hike in 2016

By Jason Douglas and Paul Hannon 

        LONDON--The Bank of England on Thursday signaled it remains on course to start gently raising interest rates in the U.K. early next year, damping speculation that it would quickly follow the U.S. Federal Reserve, which is seriously considering a September liftoff.
        In a barrage of data and statements, dubbed "Super Thursday" by analysts, the central bank said officials agreed to leave the BOE's benchmark interest rate at 0.5% and the size of its bond portfolio at GBP375 billion ($585 billion) following this month's policy meeting.
        Minutes of officials' deliberations, published simultaneously with the rate decision instead of with the customary two-week lag, revealed the decision wasn't unanimous: Ian McCafferty voted for an immediate rise in the BOE's benchmark rate.
        Mr. McCafferty judged a rate rise was needed to keep inflation in check and to ensure that future rate rises stay smooth and gradual, the minutes record.
        For the majority, however, a rise in interest rates wasn't necessary. In the BOE's quarterly inflation report, also published Thursday, forecasts showed that officials expect annual inflation to rise back to its 2% target by the third quarter of 2017 provided that interest rates rise in line with expectations in financial markets.
        Those expectations are for the BOE to begin lifting its benchmark short-term rate from 0.5%, where it has been pegged since early 2009, in the first half of 2016.
        "The likely timing of the first bank rate increase is drawing closer," said Mark Carney, the BOE's governor, in a news conference. "However, the exact timing of the first move cannot be predicted in advance; it will be the product of economic developments. In short, it will be data dependent."
        The BOE's latest forecasts are consistent with recent statements by Gov. Mark Carney that the decision on when to raise rates will come into clearer focus around the turn of the year. But some investors and analysts had been anticipating the rate-setting panel would signal this month that it was prepared to move sooner to keep inflation in check.
        The British pound extended losses against the U.S. dollar and the euro after the decision. Sterling traded 0.6% lower against the buck at $1.5510 and slipped by a similar amount against the euro.
        In the U.S., the Federal Reserve is also preparing to raise interest rates, perhaps as soon as September.
        The BOE's forecasts show that officials expect the U.K. economy to grow by a healthy 2.8% this year, fueled by rising incomes and greater business investment. Annual inflation, which has been hovering around zero in recent months because of a sharp fall in oil prices, is expected to stay low for the rest of the year because of further falls in commodity prices and a strong pound, which bears down on prices for imports.
        The BOE highlighted the "particular uncertainty" around the future path of sterling, and the scale and duration of its impact on the U.K.'s inflation rate, as an influence on its future policy decisions.
        "There has been a big move in sterling," Mr. Carney said. "There's no question the persistent strength of sterling has had an impact on policy."
        The move by the BOE to publish its rate decision, minutes and inflation report on the same day followed a review into its disclosures practices late last year, which concluded the new schedule would foster a better understanding of officials' decisions and ease market volatility.
        Write to Jason Douglas at jason.douglas@wsj.com and Paul Hannon at paul.hannon@wsj.com
        (END) Dow Jones Newswires

        August 06, 2015 08:36 ET (12:36 GMT)

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