The Bank of England will be holding its first monetary policy meeting of the year this week. The markets expect no changes to interest rates which remain at 0.50%. The Bank of England hiked interest rates for the first time in a decade in November 2017.
This came as the central bank hiked rates to contain inflation which overshot the BoE’s 2% inflation target rate and remains stubbornly above this level. Recent data however indicates that inflation might have peaked at 3.1% as consumer prices rose just 3.0% in December, a month after the BoE hiked interest rates.
Despite the rate hike, wage growth continues to remain a concern for the BoE. However, according to some central bank officials wages are expected to rise this year.
BoE Governor quizzed by lawmakers
Last week, the Bank of England Governor, Mark Carney was quizzed by British lawmakers. Carney, known to be pessimistic on the outcome of the Brexit decision, justified his views to lawmakers.
In his testimony, Carney told lawmakers that the inflationary effects were due to the steep fall in the exchange rate of the British pound following the Brexit vote in 2016. He was however, reassuring of the fact that the bulk of the effect had already passed.
Carney was optimistic about wages, as he said that there could be a rebound in the wage growth this year, following a lengthy squeeze largely due to the strong rise in consumer prices.
“There is a prospect of a return to real income growth rate later this year,” Carney told lawmakers.
BoE monetary policy decisions tied to Brexit talks
Few weeks ago, Mark Carney was speaking at the World Economic Forum in Davos. In his speech, the Bank of England Governor said that the path of interest rate hikes in the UK would be closely tied to the Brexit talks and the negotiations with the EU.
Carney, known to be pessimistic on Brexit said that the UK’s ability to grow and the future direction of the exchange rate depended largely on the trade talks between the UK and the EU.
Many economists are also skeptical about the British economy after the Brexit talks end. By some estimates, the UK’s economy is expected to face obstacles regardless of what deal the UK government manages to get with the EU.
Meanwhile, other uncertainties also figure especially on the political front. With the fragile alliance formed by the Theresa May government, political risks in the country still remains high. This could possibly keep investors on the edge especially when it comes to disagreements between the government and its political partners on the Brexit deal.
In the fourth quarter, the UK’s economy was seen advancing 0.5% on the quarter. This was higher than the forecasts given by the Bank of England. The better than expected GDP data raised expectations that the Bank of England will push for another rate hike sooner than later.
While this might be mere speculation, there is evidence suggesting that the Bank of England will upgrade its growth forecasts.
This comes from the fact that the recent data suggesting softness in inflation which is expected to give some breathing room for wages to catch up could narrow the real wage growth. Until December, UK’s inflation outpaced wage growth.
However, this is expected to change largely thank to the exchange rate of the British pound which has managed to rebound strongly on the back of a weaker U.S. dollar and broadly better than expected economic data from the UK.