Euro zone bond yields stabilised on Thursday, after a sharp rise the previous day fuelled by concern that the Federal Reserve and the Bank of England were heading for their first interest rate increases in nearly a decade.
In recent weeks, traders have become increasingly bullish about the timing of an increase in the bank’s 0.5 per cent main rate, with forward contracts based on the Sterling Overnight Index Average (Sonia) implying a move next May.
The prospect of a rate rise is better news for savers, so locking your money up for a lengthy period may not be the best idea.
The Bank forecasts that inflation will hover around zero for the next few months, with the potential for again turning negative as it did briefly earlier this year.
Larry Elliott, economics editor of the Guardian newspaper, called Super Thursday a “data dump” and said: “The information overload will make it harder not easier for the Bank’s thinking to be scrutinised”. Investors are fully pricing in a quarter-point rate increase by May next year, Sonia forwards show.
Indeed the pickup seen on the productivity front is an area of encouragement for the Bank, as increased productivity, along with some tightening in the labour market has led to wage growth.
‘As the UK expansion progresses, speculation about the precise timing of the first move in Bank Rate is increasing, ‘ said the Governor.
The inflation report also mentions some outside risks, like the recent explosion and collapse of Chinese stock prices, as well as the turmoil in the Greek economy.
It was the first dissent since a series of 7-2 split votes at the end of 2014.
Dubbed “Super Thursday” by economists, the decision was accompanied by the minutes of the meeting and the bank’s Quarterly Inflation Report for August. “Many people are just about managing financially which means even a small interest rate rise can tip them over the edge”.
Over the longer-term horizon, more relevant to the MPC’s policy, the BoE sees inflation at its 2% target in two years and above that level – at 2.1% – a year later.
Economists such as Bank of America Merrill Lynch’s Rob Wood see the latter pushing down the MPC’s near-term inflation forecast, though its projections further out will be little changed as the temporary deflationary factors fade.
Or, to put it another way, even though the Bank rate is likely to stay on hold for another six months, your mortgage is highly likely to get more expensive anyway.
“The committee wants to be cautious and wait for price pressures to emerge before pressing the lift-off button”.
The Bank said the central estimate of the MPC was that there remains slack of 0.5 per cent of GDP in the economy, unchanged since its report in May, although it stressed that there was a “range of views” on this subject on the committee.
For others, mainly Andy Haldane, wage inflation “isn’t racing away” and there shouldn’t be any rush to raise rates. “As such, this represents a baby step closer to a rate hike rather than a stride”.