Changes in central bank’s monetary policy remains a constant source of debate and speculation during this period of global growth uncertainties. China, Japan and Europe could well add further monetary stimulus, and in contrast the Federal Reserve and the Bank of England may well reduce it, if they increase interest rates in the coming months.
On Thursday we get the latest Bank of England’s quarterly inflation report, as well as the interest rate decision and the release of the minutes of the last meeting. Analysts will want to know how the Bank now views the balance between global growth concerns, against an improving picture in the UK, and what impact this is having on interest rate decisions. Recently wages, unemployment and retail sales data have come in higher than analyst estimates, this could lead the policy committee to issue a more hawkish statement.
The Banks inflation report back in May indicated that the MPC did not expect rates to rise before the middle of 2016. Mark Carney, at that meeting lowered growth forecasts from 2.9% to 2.5% for 2015 before raising expectations slightly to 2.8% at the August meeting. In May the governor expected UK inflation to fall to zero in the coming months, which it did. He also did not expect the UK economy to reach the 2% target for inflation for a couple of years, and reiterated that view in August. The other question mark is the level of space capacity in the economy. In August the Bank estimated the amount of space capacity in the economy to be around 0.5% of GDP, any reduction in spare capacity will also be seen as raising inflationary pressures.
The Bank of England may be in a more difficult position this time, should they remain cautious economic growth expectations whilst raising inflation expectations, this could lead to stagflation concerns, inflation with little economic growth. This is the worst of outcomes for central bankers as it can put pressure to raise rates, to reduce inflationary pressures at a time when the economy is not growing fast enough.
Not a lot has change in the currency or bond markets since the last inflation report. 10-year gilt yields are approximately where they were, and the pound has weakened slightly since the August report. Two year yields have risen from modestly to 65 basis points, two year yields are considered the most sensitive to interest rate expectations.
At the time of the last inflation report in May the vote was 8-1 for a rate rise, where it has remained. Some of the papers at the weekend speculated we could see more members of the Monetary Policy Committee vote in favour of a rate rise, analysts forecast the vote to remain at 8-1 on Thursday.