Andrew Bailey, an economist who believes financial markets are wrong to believe that the Bank of England will increase interest rates further to convince investors that Britain has a different economic outlook to the US and the eurozone, said Andrew Bailey.
On Wednesday , the BoE governor stated that the bank does not believe it will raise rates beyond the current 4% rate — even though the market expects rate increases to rise in the coming months have increased in tandem with changes taking place in advanced economies.
Markets expect UK rates to reach 4.75 percent by the end of 2013, up from a peak of 4.25 percent at February’s start.
Bailey stated that he hadn’t seen any data that would justify such a shift in outlook. He also said that the BoE had changed its previous stance, “that further increases [in] the benchmark] bankrate would be necessary”.
He said: “At the moment, I would warn against suggesting that either we have stopped increasing bank rates or that we won’t need to do any more.
After Bailey spoke, the pound lost its earlier gains. However, UK government bond yields fell after Bailey spoke. But these moves were short-lived. On Wednesday afternoon, the yield for 10-year gilts had risen to 3.84 percent from 3.32 percent a month earlier.
The market expectations for further UK interest rate increases have closely tracked with US and European inflation data. These data have been worse than expected in the past month.
These numbers have led to expectations that the US Federal Reserve will raise rates more than they previously thought. However, UK inflation data have not exceeded forecasts.
Bailey stated that the UK’s economy is developing much faster than we anticipated, contrary to the US and Eurozone indicators. He said that inflation was only slightly lower and that wages and economic activity were “slightly more robust” than expected.
He spoke on a day in which British house prices experienced their biggest decline in over a decade. The BoE must “monitor closely” how the sharp rise in rates in the past 15 month was “working its way through economy to the prices faced consumers”.
The property prices dropped 1.1% in Februaryy, compared to the same month last years, which is the largest drop since November 2012 according to Nationwide mortgage provider.
As Jeremy Hunt prepares to attend his first Budget, he has also found the growing expectations of a rate rise unwelcome news.
Market expectations about rates directly impact five-year forecasts from the Office for Budget Responsibility (fiscal watchdog) on the cost of servicing government bonds.
The BoE expects inflation to drop rapidly in 2019, especially April, when energy bills will rise less than they did last year.
Bailey stated that smaller increases would not alleviate households’ problems with rising living costs because prices have not fallen.
He said that inflation could become more persistent if the BoE raised rates further.
“If we do not do enough with interest rates now we will have to do more in the future.” He said that the experience of the 1970s taught him this important lesson.