FOCUS BoE warns that rates may have to rise again

BY

The Bank of England has fired a warning shot that UK interest rates may rise again even though inflation is below target and the financial markets remain in a very jittery mood.
Though the BoE kept its key bank rate at 5.75 pct for the second month running, it issued its first accompanying statement to an unchanged decision for more than eight years in order to address the market turbulence seen in recent weeks.
In it, the Bank said it is too early to assess how the turmoil will affect the availability of credit to UK companies and housing, adding that it will monitor developments in credit markets closely.
However the BoE emphasised that its mandate remains to set interest rates in order to meet the government s inflation target, and that it is considering the credit market developments only in terms of their inflationary impact on the wider economy.
Bank watchers said this suggests that it is too early to conclude that the August Inflation Report s heavy hint of one more rate hike is dead in the water.
"The market volatility of the last month will only prevent a further rate rise if the Monetary Policy Committee deems that it has significantly dented the outlook for activity and price pressures," said Roger Bootle, senior advisor to Deloitte.
The BoE statement did acknowledge July s drop in annual CPI inflation to back below its 2.0 pct target, saying it may remain around, or a little below the target for the next few months. It also said that pay pressures remain muted and noted tentative signs of a slowdown in consumer spending.
But despite this the Bank repeated the assessment of inflationary pressures it made in the August Inflation Report.
"The recent solid pace of output growth has been sustained and the margin of spare capacity appears limited," it said, adding that pricing pressure indicators remain somewhat elevated.
"Hence, even if there is some impact of market volatility on credit conditions as seems likely it could yet be offset by momentum in other parts of the economy," said Alan Castle, UK economist at Lehman Brothers.
As a result, sterling markets think the BoE has given little away in terms of where rates will go, indicating instead that it is now in wait-and-see mode.
Karen Ward, UK economist at HSBC, said the BoE is keeping "its fingers crossed" that all the market turmoil "will all go away".
"They acknowledge there may be spillovers which they will monitor but at the moment they believe the impact will be limited," she said.
But other economists are more dovish, believing the bank is trying to manoeuvre itself into a position where it could cut rates if deemed necessary.
"The message up-front today was that a rate cut would only be justified if the inflation target were likely to be undershot without one - nonetheless, the evidence for generating a view of an inflation undershoot is building," said Daragh Maher at Calyon.

JKL

thanks