Bank of England Will Raise Key Rate in Early 2016, Niesr Says

  • U.K. inflation will average 1.1% next year, below BOE target
  • Fed delay could push back U.K. interest-rate increase to May

The Bank of England will probably raise its benchmark interest rate in February, marking the first tightening of U.K. policy since 2008, according to the National Institute for Economic and Social Research.

While the institute forecasts low average inflation next year, early signs of stronger price pressures can currently be seen in earnings growth, Niesr economist Jack Meaning told reporters in London on Tuesday. It sees inflation averaging 1.1 percent next year and 1.8 percent in 2017, below the BOE’s 2 percent goal, but higher than it forecast in August.

Like the U.S. Federal Reserve, the BOE is inching toward removing emergency stimulus and increasing rates. Governor Mark Carney has said that the factors currently weighing on prices will begin to drop out of consumer-price calculations around the turn of the year, and the bank’s stance on monetary policy will become clearer at that time. Others including Andy Haldane are unconvinced that the economy is strong enough to warrant a hike soon.

Meaning said the distribution of views on the Monetary Policy Committee has become “quite bi-modal.” That, and the possibility of the Fed delaying its own rate increase until 2016, means there’s a higher chance the U.K. move gets pushed back to May from February.

“The bank will wait to see, if it’s a matter of a few months, what the repercussions of the Fed raising interest rates are before they move,” Meaning said.

Niesr estimates that the U.K. economy will grow 2.4 percent this year and 2.3 percent in 2016, slight downgrades from August, and by 2.6 percent in 2017. A poor productivity performance is the biggest downside risk to their forecast.

BOE officials will publish their latest interest-rate decision alongside new economic forecasts on Thursday. Economists forecast they will keep the rate at 0.5 percent, a record low.

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