King Wins ‘Breathing Room’ to Keep BOE Rate on Hold After Data
Bank of England Governor Mervyn King
Chris Ratcliife/Bloomberg
Bank of England Governor Mervyn King.
Bank of England Governor Mervyn King. Photographer: Chris Ratcliife/Bloomberg
April 12 (Bloomberg) -- Azad Zangana, an economist at Schroder Investment Management, discusses U.K. inflation which unexpectedly slowed in March for the first time in eight months. He talks with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)
Bank of England Governor Mervyn King won respite from pressure to end record low interest rates as soon as next month after inflation unexpectedly slowed and retail sales plunged.
The bank may now have greater scope to delay following the European Central Bank, which lifted rates for the first time in almost three years on April 7. While King has kept calls from some U.K. policy makers to raise borrowing costs at bay by pointing to risks from the government’s fiscal squeeze, the International Monetary Fund said this week a surge in inflation above the 2 percent goal threatens the bank’s credibility.
“It gives them some breathing room,” said Azad Zangana, an economist at Schroder Investment Management in London and a former U.K. Treasury official. “It’s very unlikely they’ll move in May now. Before they raise they’ll want to see evidence the fiscal squeeze hasn’t derailed the recovery, and realistically they can’t make that judgment until August at the earliest.”
Inflation slowed to 4 percent in March from 4.4 percent in February, the Office for National Statistics said yesterday, while the British Retail Consortium reported that retail sales fell 1.9 percent from a year earlier, the most since the data began in 1995. Data today showed jobless-benefit claims unexpectedly rose by 700 in March, though the unemployment rate fell to 7.8 percent in the quarter through February.
The reports came as the economic recovery, already challenged by a contraction in the fourth quarter, grapples with the budget squeeze, the biggest since World War II.
Investor Bets
Investors pared bets on the timing of the central bank’s first rate increase after the inflation data. Having priced in a quarter-point move by July as recently as April 8, they are now betting that won’t happen until October, according to forward contracts on the sterling overnight interbank average compiled by Tullet Prebon Plc.
BNP Paribas economist Alan Clarke and JPMorgan economist Malcolm Barr pushed back their forecasts for a quarter-point rate increase to August from May.
The pound rose as much as 0.3 percent against the dollar today and traded at $1.6283 at 2:16 p.m. in London. It touched the weakest in almost six months against the euro, reaching 89.24 pence before strengthening to 89.05 pence. Bonds fell, with the yield on the two-year gilt rising 3 basis points to 1.28 percent.
‘Inflation Fighter’
King’s reluctance to tighten is setting him apart from European counterparts. ECB President Jean-Claude Trichet left the door open for further rate increases to control price gains in the euro region after his Frankfurt-based bank lifted its benchmark by a quarter point to 1.25 percent.
Poland’s central bank raised interest rates for the second time this year on April 5, while Sweden’s Riksbank lifted its benchmark repo rate for a fifth time since July in February.
“U.K. inflation is still way above target and there’s a chance that second-round effects will materialize,” said Joost Beaumont, an economist at ABN Amro Bank NV in Amsterdam. “Their credibility as an inflation-fighter has taken a hit, while the ECB have made their focus on price stability very clear.”
The IMF said on April 11 that the surge may threaten the Bank of England’s credibility and that central banks “need to communicate very clearly how they intend to respond to one-time or relative price shocks.”
Wise King
King has tried to head off criticism, saying in a speech in January that policy makers will “try even harder to explain the basis for policy decisions.” He reiterated comments he made in 1997, that when price shocks hit the economy “it may be sensible to extend the horizon over which inflation returns to its target level.”
“The comments on extending the time period for meeting the target show that King has been wise before the fact,” said Richard Barwell, an economist at Royal Bank of Scotland Group Plc and a former central bank official. “They should hold their ground, because it doesn’t make any sense to raise rates given what’s coming for the economy.”
The nine-member Monetary Policy Committee remains split on the outlook for rates. Three members called for a rate increase last month and one said the bank should expand its bond program from the current 200 billion pounds ($325 billion). Minutes of this month’s meeting will be published on April 20.
The bank forecast last month there was a “significant risk” inflation will exceed 5 percent due to a weak pound and surging commodity prices. Andrew Goodwin, an economist at Ernst & Young’s Item Club, said yesterday that this is “unlikely to be realised,” while Allan Monks at JPMorgan said inflation is likely to peak below this level.
“There’s a low probability they’ll raise rates now, there are signs the recovery is starting to struggle,” said Vicky Redwood, an economist at Capital Economics in London and a former central bank official. “The bank has been in a difficult position, but it’s taken the right course of action in keeping rates on hold.”
To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net
To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net
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