The international rugby season kicks off on Saturday as England take on the All Blacks at Twickenham, but on the other side of town in the City next week Bank of England Governor Mark Carney will be doing his best impression of Jonny Wilkinson in his heyday.
Expect Carney to kick an interest rate hike into touch as surely as England’s record points scorer, pictured, when the Bank presents its latest inflation and growth forecasts on Thursday, against an economic backdrop distinctly chillier than the summer.
The mood music has already been set by a scrum of monetary policy committee members in speeches and interviews. They’ve all said with varying degrees of bluntness that rates are going nowhere and the day of the first rise since 2007 is receding, not drawing closer. Hawks Martin Weale and Ian McCafferty are meanwhile bouncing off a determined MPC pack.
In another example of the folly of forecasting, there will be a big shift lower in the Bank’s predictions on the cost of living, which it thought just three months ago would average 1.9% in the final quarter of this year.
Lower oil and food prices have pushed the Consumer Prices Index to just 1.2%, and a letter to the Chancellor may well be in prospect for undershooting the 2% inflation target.
But for the City — and by extension for those of us with mortgages trying to divine the Bank’s intentions — the key numbers, as ever, are where the Bank believes inflation will be in two and three years’ time. Its number-crunchers base the forecasts on market expectations for when interest rates will go up; the market is currently fully pricing in a quarter-point rise by August next year.
So if the Bank doesn’t budge its forecasts for 2016 and 2017 — currently 1.77% and 1.96% respectively — that’s as clear a signal as you’re likely to get that the market has got things roughly right, and we can all forget about higher mortgage bills until after the next election at least. A much higher inflation forecast down the line, however, means sweaty palms for homeowners.
Carney may pay lip service to rates having to go up at some point, but it is also likely that the Bank will pare back its growth forecast for 2015 from its toppy-looking 3.1%, given the travails across the Channel in the eurozone.
Admittedly, the Bank isn’t averse to raising rates when inflation is below target — it did so in 2004. But that wasn’t after a brutal recession, so it would be staggering to hear the Governor strike an upbeat tone given a easing housing market and this week’s purchasing manager surveys, which show a clear softening in the UK.
The good news for the Bank is that it still has some breathing space for loose policy. Alongside low inflation, the share of workers participating in the jobs market has fallen slightly recently, and is still below the Bank’s estimatesof its potential: this suggests more slack to be used up.
Productivity has showed signs of life, with output growing much faster than hours worked. Unemployment, though lower, remains above the level at which the Bank believes it will begin to drive up inflation. Barring a sudden revival in wages — of which there is little sign yet — the MPC’s hawks face a lengthy struggle to get a rate rise over the try line.
