The markets had “a brief summer flirtation with the idea that the [Bank of England] might tighten monetary policy sooner than expected”, says Peter Thal Larsen on BreakingViews.com. But it seems to be over now. In June, the Monetary Policy Committee voted by five to three to keep interest rates on hold, an unexpectedly narrow majority. At last week’s meeting, though, the vote was six to two.
Inflation fell back in June – to 2.6% from May’s 2.9%. And the latest Inflation Report by the Bank was “more gloomy and dovish”, says Patrick Hosking in The Times. It cited uncertainty over the post-Brexit landscape as reason to lower its growth forecasts. It thinks GDP will expand by 1.7% this year, down from a previous estimate of 1.9%. There seems little prospect of interest rates rising from their emergency levels of 0.25% anytime soon. The report assumes savers will have to wait until the summer of 2018 before dearer money arrives, by which time they will have suffered almost a full decade of near-zero rates.
But “this is not a science”, as Hosking reminds us. “Always keep in mind an image of [Governor] Mark Carney in a fortune-teller’s shawl examining tea leaves and scratching his head.” His forecasting record is hardly stellar, and he may be too pessimistic about the outlook. The squeeze on real incomes is expected to peak next year and global growth looks solid. What’s more, as Capital Economics notes, for all the gloomy talk, the report barely changed its growth forecast and noted that the outlook for activity was similar to that in May. In any case, the hawks are merely advocating a reversal of last summer’s post-vote cut. There’s a “decent chance” that could happen before the middle of next year.