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BOE may face pressure to increase interest rate: economists

The decision Thursday by the Bank of England (BOE) to leave the bank rate at 0.5 percent was no surprise but economists are speculating that the resurgent economy and resultant fall in the jobless may mean the rate could be cut before the end of 2014.

The Monetary Policy Committee (MPC) of the BOE, or the British central bank, has targeted 7 percent unemployment as the threshold at which it reviews the bank rate which has been held at the historic low of 0.5 percent since early 2009 in response to the financial crisis.

Blerina Uruci, Britain economist with Barclays Economics Research, said given the fast pace of the recovery so far and the unexpected strength of employment growth, the MPC faces a communication challenge regarding its indication that bank rate will remain low for long.

"With rising risks that the unemployment rate will fall to 7 percent, faster than the MPC initially anticipated, it has increasingly emphasised the fact that the unemployment rate is only a threshold and it hitting 7 percent is a necessary but not sufficient condition to start tightening," she added.

If the pace of the recovery is sustained and the unemployment rate continues to surprise on the downside, the MPC will be under increasing pressure to clarify what will happen once the jobless threshold is reached.

The unusual circumstances of the recovery, with a prolonged period of weak growth since the financial crisis, would mean that monetary policy should remain accommodative for some time to come, said Uruci.

She noted that the faster fall in the unemployment rate may be signalling less spare capacity in the economy and will make it increasingly harder to maintain bank rate at its 0.5 percent record low.

"This raises risks that the first hike will come in 2015 rather than 2016, in our view," the economist added.

Daiwa Capital Markets said while the economy is growing quickly, the level of gross domestic product remains below where it was before the crisis struck, inflation had fallen fairly rapidly back to towards the MPC's 2 percent target, and wage growth remains well below that rate.

For these reasons a rate cut this year was less likely, the agency said in a note.

[Source: Xinhua, London, 09Jan14]

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