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BoE's Pill: If growth stalls next year, Bank rate will remain unchanged or even fall
The outlook for interest rates is expected to become more uncertain from spring, Bank of England (BoE) Chief Economist Huw Pill said on Friday, according to Reuters. On rates next year, he stressed that "nothing is baked in".
Pill outlines the factors shaping interest rates
"There is no preset upward path for interest rates from spring and beyond."
"Possible that bank rate would stay on hold or even fall if we saw stalling of growth next year."
"Key determinant will be margin squeeze on companies and how companies react."
GBP/USD stays under pressure
Following Pill’s remarks, GBP/USD continued to face selling pressure. The pair was last trading at 1.3390, down 0.45% on the day.
BoE explained
Responsibility for monetary policy in the United Kingdom rests with the Bank of England (BoE). The central bank’s main objective is ‘price stability’, meaning inflation held steadily at 2%, which it pursues by adjusting base lending rates. By setting the rates at which it lends to commercial banks and banks lend to one another, the BoE determines interest rates across the wider economy. These decisions also affect the value of the pound sterling (GBP).
Inflation above the Bank of England’s target prompts interest rate rises, increasing borrowing costs for households and businesses. Sterling benefits because higher rates make the UK a more attractive destination for international investors’ money. By contrast, inflation below target signals slower economic growth. The BoE will then consider cutting rates to reduce borrowing costs, hoping that businesses will take out loans to fund projects that generate growth. This is negative for the pound sterling.
When interest rate cuts cannot deliver the required outcome, the Bank of England can turn to Quantitative Easing (QE) as a last resort in extreme circumstances. This policy substantially boosts the flow of credit through a stalled financial system. To carry it out, the BoE prints money and purchases assets from banks and other financial institutions, typically government bonds or AAA-rated corporate bonds. The usual effect of QE is a weaker pound sterling.
As the economy strengthens and inflation begins to climb, Quantitative tightening (QT) reverses the process of QE. Under QE, the Bank of England (BoE) buys government and corporate bonds from financial institutions to encourage lending. Under QT, however, it ceases further bond purchases and no longer reinvests the principal repaid when bonds in its existing portfolio mature. This usually supports the pound sterling.
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