The BoE can be expected to reiterate the need for low rates given the current scenario and the central will likely use the inflation report to justify its policy stance.
UK GDP grew 0.5 per cent quarter on quarter in Q4. Year on year, GDP grew 1.9 per cent in Q4, slower than 2.1 per cent growth recorded earlier. Annual growth came in at 2.2 per cent in 2015, after expanding 2.9 per cent in 2014. The Confederation of British Industry (CBI) showed that the UK economy expanded at a pace which is noted to be the slowest since May 2013 in the three months to January. CBIÃ¢â‚¬â„¢s survey of manufacturers, retailers and the services sector indicated that the economy will show Ã¢â‚¬Å“modestÃ¢â‚¬Â expansion in Q1 2016. Policymakers can thus be expected to slash their 2016 growth forecast to around 2.3 per cent from their NovemberÃ¢â‚¬â„¢s projection of 2.5 per cent growth. 2016 might be another year of slowing growth as emerging economies led by China continue to weaken and turmoil in the financial market rises. Carney acknowledges Ã¢â‚¬ËœThe world is weaker and UK growth has slowed,Ã¢â‚¬â„¢ he said.
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The weak global outlook has hurt UKÃ¢â‚¬â„¢s manufacturers while the manufacturing exports have been hurt by the strong pound. Wage growth has been slow though the labor market has been noted to have strengthened considerably. Carney and the MPC members have time and again reiterated that the central bank will not raise rates unless wages rise on expected lines.
Lower oil on the other hand has kept prices in check, negatively impacting inflation. The oil slump is believed to compel policy makers to revise down their near-term inflation forecast. Minutes of the MPCÃ¢â‚¬â„¢s January meeting revealed that the central bank believes that inflation measured by the consumer prices index, will increase Ã¢â‚¬Å“slightly more graduallyÃ¢â‚¬Â than its November forecast. Oil prices have also fallen 30pc since November. Inflation is thus currently being expected to rise to 0.5pc by Ã¢â‚¬Å“the early months of 2016Ã¢â‚¬Â
Given that low oil price is here to stay for some more time rise of inflation from o.2 per cent closer to the central bankÃ¢â‚¬â„¢s inflation target of 2 per cent will take longer. Also, inflation can be expected to stay at its current low level Ã¢â‚¬Å“for several monthsÃ¢â‚¬Â. The central bankÃ¢â‚¬â„¢s quarterly inflation report can be expected to highlight the dismal price environment in the UK.
Researchers at Lloyds bank are of the opinion that Ã¢â‚¬Å“With the MPC's forecasts conditioned on a much shallower policy rate profile, a smaller inflation overshoot at the 3-year horizon than in November would send a dovish signal.Ã¢â‚¬Â
Carney has specifically that the global financial backdrop was Ã¢â‚¬ËœunforgivingÃ¢â‚¬â„¢ and stressed that Ã¢â‚¬Ëœnow is not yet the timeÃ¢â‚¬â„¢ to raise rates. He went on to add UKÃ¢â‚¬â„¢s exposure to the weakness in the global economy provides sufficient reason for the central bank to forestall the tightening cycle for now. Majority of MPC members are in agreement and supports low rates for now. The revision of forecasts for economic growth and inflation will shift rate hike further into the future.
Markets broadly believe that the BoE will hold rates steady throughout 2016. Howard Archer of IHS noted Ã¢â‚¬Å“The analysis and forecasts contained in the Quarterly Inflation Report, as well as the February MPC minutes, should offer further clues as to whether the Bank of England really is likely to hold off from an interest rate hike until 2017Ã¢â‚¬Â. He is currently of the opinion that the central bank will raise rates by 25 basis points only in November 2016.
Ruth Miller, an economist at Capital Economics observed that Ã¢â‚¬ËœA lower profile for growth and inflation over the next few quartersÃ¢â‚¬â„¢ would write off rate hike expectations. Ã¢â‚¬Å“In contrast, a stronger medium-term outlook will suggest that markets are wrong to expect rates to stay on hold until well into 2017Ã¢â‚¬Â, Miller said.
The central bankÃ¢â‚¬â„¢s decision will on one hand bring relief to families who are worried about the rise in mortgage costs. However, the decision to keep rates low at 0.5 per cent will hurt interest of UKÃ¢â‚¬â„¢s savers who have lost out on substantial monetary gains n account of low rates for the last six years.
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