Points of View: Inflation and interest rates
This week has seen plenty of positive news for the UK economy; the International Monetary Fund (IMF) sharply increased its growth forecast for the UK economy (it now expects the economy to grow 2.4% this year – faster than any other major European economy), unemployment has fallen to 7.1% and inflation has hit the Bank of England’s target of 2% for the first time since 2009.
This better-than-expected recovery has caused the Bank’s new Governor, Mark Carney, to back-track somewhat on his forward guidance last August that the intent is to resist raising interest rates, which have remained at their record low level of 0.5% since 2009, until unemployment falls below 7%. With this level looking likely to be breached soon and much quicker than expected, Mr Carney clarified at the World Economic Forum in Davos last Thursday that there will no longer be one single indicator that guides monetary policy. Rather, he indicated a broader approach will be taken, with overall conditions in the labour market determining when the British economy will be strong enough to cope with higher borrowing costs. One such factor includes average wage growth which remains at 0.9%, below the level of inflation.
The Bank’s Monetary Policy Committee, which holds the responsibility for setting interest rates, is due to meet again next month and rate watchers will no doubt be keen to pore over the minutes of the meeting, which are due to be published on 19 February.