Greece’s knife-edge existence helped stay the hand of Bank of England policy makers, who kept borrowing costs at a record low on Thursday as they confront a mixed domestic economic picture.
The BOE held its benchmark interest rate at 0.5 percent, as forecast by all 41 economists in a Bloomberg survey. While Governor Mark Carney has said Britain’s direct exposure to Greece is limited, he’s still described the risks as “acute.” The crisis was also highlighted by U.S. Federal Reserve officials on Wednesday.
At home, members of the Monetary Policy Committee also assessed the economic impact of Chancellor of the Exchequer George Osborne’s latest budget, delivered on Wednesday. In recent weeks they have been setting out their differing outlooks, from labor-market tightness to downward pressure on inflation from a strong pound, fueling speculation the committee may split within months after unanimity so far this year.
“Presentationally there’s not a massive urgency to raise rates,” said Alan Clarke, an economist at Scotiabank in London and a former BOE official. “The macroeconomic data have been mixed, with wages higher than expected and some decent surveys, but the stronger pound, falling oil prices and the Greek crisis are dove friendly.”
Inflation was 0.1 percent in May and has been below the BOE’s 2 percent target since the start of last year. While the MPC’s central view is for a pickup at the end of 2015, Chief Economist Andy Haldane has warned of potential downward pressure from sterling’s appreciation. On the other side, Martin Weale is focused on accelerating earnings growth, telling the Financial Times that the labor market is “fizzing away nicely.”
The minutes on the MPC’s decision will be released on July 22. This month’s meeting will be the last with a staggered schedule. From August, there will be a new communications format that will see officials publish their rationale, vote and forecasts alongside decisions.
Economists in a Bloomberg survey predict the BOE will raise the rate in the first quarter next year. Investors are only fully pricing in a 25 basis-point increase by August 2016.
“I think the bank’s going to be happy to sit on its hands, even without Greece,” said George Buckley, an economist at Deutsche Bank AG in London. “They want to see some evidence that inflation is rising back toward target. We’ll get that near the end of this year, start of next year.”
In their latest projections, BOE policy makers cut their forecast for growth and Carney said they aren’t complacent about the threats from Greece. Euro-area leaders will hold a crucial meeting this weekend where failure to reach a bailout deal could lead to Greece’s expulsion from the currency bloc.
Policy makers around the world are assessing the threat to their economies. Fed officials boosted speculation they will delay increasing rates until next year after highlighting the risks from overseas crises such as Greece in the minutes of their June meeting published on Wednesday.
In the meantime, Britain’s economy is giving off mixed signals. While growth probably accelerated in the second quarter, the recovery remains uneven, with services surging and manufacturing at its weakest in more than two years.
There are also concerns about productivity; without a pickup, wage pressures may mount and companies could be forced to raise prices faster to protect profit margins.
In the first purely Conservative budget for almost two decades, Osborne allocated more money for public services by slashing welfare spending, raising taxes and increasing borrowing. He pushed back by a year the target for achieving a fiscal surplus to 2020.
“Fiscal policy was already being tightened, and if anything, one can argue that the spending levels have been relaxed a little bit over the forecast period,” said Philip Shaw, an economist at Investec Securities in London. “We’re still in a period of austerity, but that degree of austerity doesn’t seem to be quite as severe as already penciled in.”