THE Bank of England’s chief economist has given the clearest indication yet that interest rates are unlikely to rise until the middle of next year as economic prospects have become gloomier.
Andy Haldane’s remarks appear to confirm market expectations that the probable timing of a rates hike has been pushed back from early 2015 to after the May general election.
He told business leaders at an event in Warwickshire the economic picture has worsened in recent months meaning rates “could remain lower for longer”.
He was even more explicit on the timing of a rise in an ITV News interview, saying: “If you believe the financial markets, they’re now betting somewhere in the middle of next year. Perhaps that’s not a bad bet.”
His comments came as volatile stock markets staged an end-of-week rally, with the FTSE 100 index closing up almost 2 per cent or 114.38 points at 6,310.29. There were even stronger gains on French and German exchanges.
A possible return to recession in the eurozone, a floundering economy in Japan, a slowing China and the Ebola crisis have rattled investors this week, adding to existing nerves about the end of Federal Bank stimulus in the US.
Europe is also facing renewed political uncertainty over Greece, where an anti bail-out party has taken a poll lead, as well as the ongoing fall-out from the Ukraine crisis.
Meanwhile the International Monetary Fund has downgraded growth prospects for the world economy.
On the eurozone, Haldane told ITV: “It’s a concern. It is our biggest trading partner by far. We know we’ve seen recently that any event on the continent laps back to the UK very quickly through our trade links but also through our financial links and indeed increasingly just because of confidence.
“If confidence is ebbing on the continent, it appears to leak across here pretty quickly.”
UK rates have been held at 0.5 per cent for more than five years to try to nurse the economy back to health from recession but Bank governor Mark Carney has indicated that the recovery means the time for a first rise is approaching.
Earlier this year there were some forecasts that this could come as early as November though the consensus later shifted to February.
In recent days expectations have shifted back further as figures showed inflation sinking to a five-year low of 1.2 per cent and wage growth lagging behind at 0.7 per cent, lifting any pressure for a rise.
It meant Haldane’s remarks had little effect on sterling as traders were already looking at the middle of next year as the most likely time for a rise. But his “dovish” rhetoric appears to contrast sharply with the views of Bank of England “hawks” Martin Weale and Ian McCafferty, both also members of the nine-strong rate-setting monetary policy committee.
They have already started voting for a 0.25 per cent rate rise arguing the Bank needs to act now to pre-empt wage and inflationary pressures further ahead.
Howard Archer, chief UK economist at IHS Global Insight, said: “We have put back our expectation of the first interest rate hike from February to mid-2015.”