BOE pushes rate-increase view

London

BANK of England (BOE) policymakers Ben Broadbent and Martin Weale said weak UK inflation will be temporary and indicated that the chance of more stimulus remains low.

While the bank said last week it could respond to weak price pressures with an interest rate reduction or more bond purchases, policymakers are pushing the message that such an outcome isn't the most likely scenario.

Negative interest rates are possible "but we don't think they are likely at the moment," Mr Broadbent, deputy governor for monetary policy, said on Sunday. He said that it's "not our expectation that we will" loosen policy, and the Monetary Policy Committee "still believes that the next move on interest rates is likely to be up".

Data on Tuesday is forecast to show inflation slowed to 0.4 per cent in January, the lowest since records began in 1989. With plunging oil prices accounting for much of the slowdown, the BOE is predicting a reversal at the end of this year as that effect fades. For Mr Weale, that may warrant faster tightening than investors anticipate.

Mr Weale and fellow MPC member Ian McCafferty dropped their votes to increase interest rates in January, citing the fact that inflation looked likely to persistently remain below the BOE's 2 per cent goal. Still, Mr Weale said that the outlook for consumer-price growth means the response at some point will have to be policy tightening. The key rate has been at a record-low 0.5 per cent since March 2009.

"Our recent forecast showed inflation rising above target by mid-2017," Mr Weale wrote in the Observer newspaper. "We expect that, in order to manage this, the bank rate will rise gradually. In my own view, rates will also have to rise somewhat earlier than market participants currently expect."

The BOE has forecast that Britain's inflation rate may temporarily drop below zero in the coming months, though governor Mark Carney last week said that the UK isn't experiencing deflation. He also said that the "most likely next move in monetary policy is an increase in interest rates."

Mr Carney said that he doesn't want to wait too long before trying to get inflation back to its goal, and will aim to reach the target once the impact of the oil-price slump abates. In its quarterly forecasts, the central bank predicted the economy will grow 2.9 per cent this year and increased its outlook for 2016 and 2017 to 2.9 per cent and 2.7 per cent, respectively. BLOOMBERG