BOE Set to Weigh China Risks While Maintaining Record-Low Rate

Updated on
  • McCafferty seen maintaining call for rate increase to 0.75%
  • New policy maker Gertjan Vlieghe to vote at first meeting

Bank of England officials will probably keep interest rates at a record low this month, as fluctuations in financial markets, a slowdown in China and a drop in oil prices cloud the outlook.

Policy makers seeking to chart a course away from ultra loose policy have to weigh international risks that are running counter to domestic expansion. While Governor Mark Carney said Aug. 29 that market turmoil hasn’t pushed back the prospect for higher borrowing costs, it will probably be enough to keep Ian McCafferty-- last month’s sole dissenter -- on his own in insisting that higher rates are needed now, according to a Bloomberg News survey completed Friday.

“There’s no hurry to raise rates so they can wait to see how the emerging-market volatility plays out,” said Philip Shaw, an economist at Investec Securities in London. “I don’t see anything in the past month that would cause any of the members to change their view.”

McCafferty will maintain his call to increase the key rate to 0.75 percent, with the remaining eight officials voting to keep it at 0.5 percent, the survey showed. The decision and the minutes of the discussion will be published in London at noon on Sept. 10.

New Member

Lower oil prices and financial-market turmoil will probably keep most officials on hold for now. Volatility surged after China devalued its currency last month, with more than than $7 trillion wiped off global stock markets.

Economists surveyed by Bloomberg see a rate increase coming in the first quarter, while Sonia forward contracts are no longer fully pricing in a move over the next year.

This month’s meeting will be the first for Gertjan Vlieghe, a former partner at hedge fund Brevan Howard Asset Management, who joined the Monetary Policy Committee on Sept. 1, replacing David Miles.

Last month’s minutes showed most MPC members saw that “the increase in inflation over the following year would be more gradual than had previously been supposed.” While price pressures showed signs of picking up last month, inflation at just 0.1 percent remains well below the BOE’s 2 percent target.

“Rates will have to go up at some point but they don’t want to start right now,” said George Buckley, an economist at Deutsche Bank AG in London. “They will want some more evidence that inflation is going to rise.”

McCafferty’s vote to increase rates accompanied the BOE’s revised forecasts on Aug. 6, which showed inflation at the 2 percent target in two years and above that level -- at 2.1 percent -- a year later. His case was strengthened this month as core inflation quickened to the fastest pace in five months, the housing market improved and signs emerged of building wage pressures.

Other MPC members might be more worried about the market turmoil than Carney, according to Brian Hilliard, an economist at Societe Generale SA in London. “Since the last meeting we’ve had an intensification of the China market volatility, which has to make people less keen to move,” he said. “There’s no urgency.”