Bank of England Starts Rate Odyssey Anew -- Heard On The Street

By Richard Barley 

        Forecasts, fan charts and a flood of data: The Bank of England deluged the market Thursday with information including the August rate decision, meeting minutes and its quarterly inflation report in an effort to give as transparent a picture of monetary policy as possible. But just two words really matter for investors: The BOE is officially "data dependent."
        That, together with the outcome of August's meeting, rather undercut the day's overblown billing as "Super Thursday." Just one member of the Monetary Policy Committee voted to increase rates from their historic low of 0.5%. That result disappointed markets, where at least two if not three dissenting votes had been expected, especially since the Greek crisis--a worry at July's monetary policy meeting--had receded. Sterling slipped as a result. But the substance of Thursday's communications was actually a little more hawkish than the market reaction might suggest.
        The BOE's forecasts now suggest that if rates are left unchanged, there is a strong chance inflation, currently zero, will be well above the 2% target in two years' time, at 2.6%. Even if rates rise in line with market expectations, inflation is seen as marginally above target in the third year of the forecast.
        That is a clear signal that the BOE thinks policy will need to be tightened relatively soon. A rate increase this year looks unlikely, but the BOE basically approved the market's thinking that rates will start rising in the first part of 2016. Governor Mark Carney went so far as to say that speculation about the timing of a rate increase was a "welcome sign" of the economy returning to normal.
        The BOE has still left itself plenty of room for maneuver. Risks from the eurozone and China remain. The key question is whether the drag on inflation from external forces such as commodities will abate and whether domestic cost pressures will be strong enough to lift inflation toward 2%.
        Still, the BOE is once again on the road to raising rates. This marks the third time since the global financial crisis that U.K. policy makers have started voting for higher rates--the first, in 2010, ended as eurozone markets blew up; the second, in late 2014, fizzled out as inflation plummeted toward zero. This third attempt, supported by a much stronger U.K. economy, stands a much greater chance of actually reaching fruition.
        (END) Dow Jones Newswires

        August 06, 2015 12:53 ET (16:53 GMT)

#StartsRate
#OdysseyAnew
#HeardOnTheStreet