Strong pound might not have lasting effect on inflation — BoE’s Forbes

Households bracing themselves for an imminent interest rate rise were given hope of a reprieve today when a Bank of England official said rates may have to be cut even further to stoke up the United Kingdom economy.

Sam Hill, an economist at RBC, said there were some other less encouraging details in the figures, including a small fall in full-time employment while part-time employment rose.

“With wage growth remaining firm, the tightening labor market means that inflation is likely to rise above target in two to three years’ time”, Weale wrote in an article for the Scotland on Sunday newspaper.

He added that surveys of economic output suggested United Kingdom growth had been on the gentlest of downward glide paths since early 2014. Core inflation, which strips out volatile components like food and energy, fell to 1.0 percent.

Pay rises are closely monitored by the Bank of England to make sure inflation will meet its 2% target in the medium term.

“With increased globalisation, it means the conditions facing the U.S. economy are likely to be similar to the ones facing the United Kingdom “, said George Buckley, an economist at Deutsche Bank in London.

“If global real interest rates are persistently lower, central banks may then need to think imaginatively about how to deal on a more durable basis with the technological constraint imposed by the zero lower bound on interest rates“. Sterling traded flat at $1.5507 after the data, and was 0.2 percent weaker against the euro at 73.02 pence.

The BoE will increase its key rate from 0.5 per cent in May 2016, Buckley forecast.

Barclays argued that the heart of the BoE’s dilemma on interest rates now is the relative strength of the pound, which last month reached its strongest level since 2008 against a basket of major currencies. Federal funds futures are now showing a less than 50 per cent chance that the central bank will raise rates in 2015.

The governor, Mark Carney, began the campaign at a lecture in Lincoln Cathedral in July, in which he said Threadneedle Street would start looking at raising borrowing costs around the turn of the year. However, the MPC also commented that the headwinds from China and the world economy did not “alter materially” the outlook published in last month’s Inflation Report, although they required “close monitoring”.

“The case for raising United Kingdom interest rates in the current environment is, for me, some way from being made”, he said.

Stock investors are betting that despite the Fed move, the BoE is next. They’re talking about rate hikes.