Presenting the latest Inflation Report today, Carney said the Bank “has the will, means and responsibility” to take further action in case deflation persists, including rate cuts and further QE.
Though this is not the Governor’s base scenario, some commentators believe deflation will be far worse than the bank expects, forcing it to act on its promises.
Nick Dixon, investment director at Aegon UK, said: “The threat of deflation, together with sterling’s gains against the euro, have created an unexpected challenge for the BoE, and we could see a 0.25% interest rate, and even a reinjection of quantitative easing, before the year is through.”
Nutmeg’s CIO Shaun Port echoes his view, saying: “In our opinion, deflation over the coming months could be larger than the Bank forecasts.
“A key risk remains demand from Europe and ongoing UK government belt tightening; another reason for the BoE to tread cautiously on its tightening timetable.”
Others, however, think inflation will not stay at such low levels for long, as cheaper energy prices will boost consumption in the economy, as the Bank hopes.
Ian Kernohan, chief economist at Royal London Asset Management, said: “Cheaper energy is actually a reflationary impulse further out, and once the oil price effect drops out of the year on year comparison, the headline rate of inflation should rise quite rapidly, albeit from a very low level.”
No rate rise this year…what about next?
Those who still expect rates to be hiked in the coming months remain conflicted on the timing. Some continue to predict an early hike, while others move their expectations further out.
Gautam Batra, investment strategist at Signia Wealth, expects “a lift-off in interest rates from a shorter runway than the market currently expects”, as rising wages and falling unemployment continue to prop up the economy.
However, Ben Brettell, senior economist at Hargreaves Lansdown, has packed back his rate hike prediction to late 2016 or even 2017 – well beyond the market consensus expectation in early 2016.
“Throughout the aftermath of the financial crisis, predictions of interest rate rises have been repeatedly kicked into the long grass,” he said. “I believe late 2016 or even 2017 is the more likely outcome.”
Aberdeen Asset Management’s chief economist Lucy O’Carroll said: “Governor Carney is firmly hedging his bets with today’s report. This is a reminder that interest rates will not stay where they are forever.”
Meanwhile, investors viewed Carney as taking a more hawkish stance, despite the talk of further cuts if necessary. As a result, sterling rose 0.8% against the US dollar to $1.54, while 10-year UK gilt yields jumped 1.2% to 1.69% by mid-afternoon.
