Central bank to challenge market complacency that cheap money cannot last.
The Bank of England will step up its warnings this week that households, businesses and investors are underestimating how soon interest rates will rise.
Many in the central bank, including Mark Carney, governor, believe that the economy is more vulnerable to inflation, so even a small improvement in its forecast for growth would require higher borrowing costs to stem rising prices.
But BoE officials acknowledge they have so far struggled to get this message across to the public. Investors do not believe the bank’s hawkish rhetoric; the City now thinks it will have to wait longer for an interest rate rise than it did a month ago.
When the bank’s Monetary Policy Committee announces its latest decision on Thursday, it will lock horns with the markets, warning that everyone is too complacent that official interest rates will remain at 0.25 per cent until the end of 2018 and will not rise above 0.5 per cent until 2021.
In last month’s meeting, the committee agreed that if the economy grew in line with the BoE’s subdued forecast, “monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the path implied” in financial markets.
Mr Carney backed this message up in an inflation report press conference, saying the BoE’s assumption at the time of “more than one interest rate hike over the course of three years . . . would be insufficient” to control inflation.
Ben Broadbent, his deputy, added: “The important point is that one should not think that the economy, at the moment, can grow at the sort of rates we used to enjoy, certainly before the crisis before running into inflationary pressure”.
Bank officials say these views have not changed and the argument for rate rises to tame price increases will have strengthened since the last meeting following sterling’s 2 per cent drop, which will further increase the cost of imports and edge inflation higher in the months ahead.
The hawkish message did not work last month, partly because Andy Haldane, BoE chief economist, failed to follow through with his suggestion that he was about to vote for a rate rise.
Economists increasingly say that the BoE’s repeated warnings will similarly fail to get people preparing for a rate rise unless more MPC members start voting for increases.
Fabrice Montagné of Barclays said: “Hawkish rhetoric by BoE policymakers will be firmly challenged [in the City] as repeated statements by MPC members that rates will have to be increased faster than the market currently expect have been continuously discounted.”
Sam Hill of RBC Capital Markets expects a “hawkish tinge” to MPC statements this week, but thinks the words can be ignored because he said there are still too many ‘imponderables’ [for MPC members] to vote for a hike”.
Thursday’s decision will be the first MPC meeting since May, comprising nine committee members with the arrival from the Treasury of Sir Dave Ramsden, the new deputy governor for markets and banking. His views on the economy are unknown, but thought to be close to the mainstream on the MPC, which he has regularly attended as the government’s observer.
Words by Chris Giles – Economics Editor
Financial Times has the latest UK and international business, finance, economic and political news, comment and analysis.