Bank of England raises prospect of higher rates as global economy booms

Bank of England raises prospect of higher rates as global economy booms

Bank of England raises prospect of higher rates as global economy booms

"Clearly, any upward movement will put further strain on indebted households and this could have a far wider effect on the United Kingdom economy in general". It now still expects average wage growth to pick up to 3 per cent this year, despite similar forecasts of an uptick frequently being proven wrong in the past.

Meanwhile stronger growth in the rest of the world may reduce immigration, cutting the supply of labour for the British economy and so increasing inflationary pressures.

"Were the economy to evolve broadly in line with.projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater degree over the forecast period than anticipated [in] November", the minutes of the MPC meeting said.

Before today's statement, investors saw a almost 50-50 chance of the next hike coming in May, when the Bank of England is due to update its economic forecasts again. That was upgraded from previous guidance of 1.7 percent.

Yet, echoing the views of government officials and business executives, the RBI appeared mindful that tightening prematurely could dent an economy experiencing only a tentative recovery after growing at the slowest pace in about three years. The expansion is becoming increasingly broad-based and investment driven. The MPC also communicated low concern about recent market volatility, seeing it as "healthier" for markets to have "two-way risk around prices".

In November the Bank's Governor, Mark Carney, had said two more rate rises were likely to be necessary by the end of 2020 to keep inflation at the official 2 per cent target.

"With inflation now at three per cent, well above the MPC's two per cent target, it's inevitable that the Bank of England will consider a further rise in rates to try to curtail the pace of inflation".

Economists said the chances of a BoE rate hike in May now depended largely on whether pay growth picks up and whether Prime Minister Theresa May can soon secure a transition deal for the two years after Brexit.

The RBI slightly lowered its gross value added forecast - a measure of economic growth it prefers - for the year ending in March to 6.6 percent from 6.7 percent.

The pound had tumbled after Britain's shock Brexit referendum in June 2016, but this has served to make British exports cheaper for foreign customers using stronger currencies. There will be ups and downs in financial markets. In turn, that stimulated economic activity.

Banks are also facing a higher cost of funds, a key expense for the lenders, and more stringent regulatory requirements for their liquidity coverage ratios, according to Ashish Parthasarthy, treasurer at HDFC Bank.

Monetary policymakers unanimously voted to hold the base rate at 0.5% in February but used the latest inflation report and update to warn the next hike will come earlier than thought past year, if the economy continues on its current path.

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