Wednesday, 3 February 2016

‘Brexit’ Referendum to Postpone U.K. Rate Increase, Niesr Says

In World Economy News 04/02/2016

The Bank of England will keep interest rates on hold until after Britain’s referendum on European Union membership, the National Institute for Economic and Social Research said as it pushed back its forecast on the timing of an increase.
The institute now predicts the Monetary Policy Committee will lift its key rate from a record-low 0.5 percent in August, six months later than a previous prediction of February. In a report published Wednesday, Niesr also predicted the fall in oil prices will leave inflation at 0.3 percent this year, down from a 1.1 percent forecast in November.
BOE officials announce their latest interest-rate decision on Thursday, when Governor Mark Carney is also due to present new economic forecasts. While the latest official data showed the economy gained a little momentum at the end of last year, Britain’s upcoming referendum, due as soon as June, is clouding the outlook.
It’s “somewhat implausible that they would increase rates just before that,” Niesr economist Simon Kirby told reporters at a press conference on Tuesday. An increase in May would have been consistent with the bank’s inflation target without the referendum, he said, but the MPC will likely wait “so that they don’t have to reverse course in the event of an exit vote.”
Niesr forecasts the BOE will increase its key rate twice this year, taking it to 1 percent by the end of 2016, and to 1.5 percent by the end of next year. Investors are more pessimistic, not fully pricing in a quarter-point increase until the second quarter of 2018. Such a delay would push inflation above the central bank’s 2 percent target and to 2.6 percent by 2019, the institute said.
The market pricing for officials to keep the benchmark unchanged until 2018 is unlikely, Kirby said.
“The argument for delaying monetary tightening hangs predominantly on heightened uncertainty,” he said. “The balancing act facing the committee is how much they can let underlying inflationary pressure build in order to give themselves time to see how these risks play out, especially given the transmission lags inherent once tightening begins.”
The U.K. will grow 2.3 percent this year and 2.7 percent next year, Niesr forecast. It said the global economy will expand 3.2 percent this year and 3.8 percent in 2017.

Source: Bloomberg