The Bank Of England Is Set To Present Its Inflation Report And All Eyes Are On The Unemployment Rate Forecast

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The Bank of England's latest inflation report is set to be released at 5:30 a.m. ET on November 13.

Markets will be watching to see if the central bank upgrades its economic forecasts.

This comes after the economy grew 0.8% in the third quarter and as the UK economy has recovered faster than expected.

Bank of England's Mark Carney introduced forward guidance back in August.

At the time, Carney said the Bank wouldn't raise rates until unemployment had fallen to 7%. He also said "guidance will cease to apply" if "material risks to price stability or financial stability are judged to have arisen."

Even back in August, some questioned whether forward guidance was necessary as the economy was getting back on track.

"The mistake the MPC has made is to set the threshold rate too high," writes Societe Generale's Brian Hilliard. Here's why: Labor data will be released an hour before the inflation report and it is likely to show that the unemployment rate eased to 7.6% in the three months to September. This would be six months earlier than forecast. 

"Only three months in to the three-year forecasting period, one quarter of the gap to the  7% threshold has already been closed," explains Hilliard. "...It is stretching credibility a little for the MPC to continue to predict that the unemployment rate will not reach 7% in three years’ time."

If the Bank of England does predict a 7% rate in three years it will also have to reiterate that 7% is not a trigger for a rate increase," but that it would be a time to reassess the health of the economy. Hilliard expects the BoE to "forcefully rebuff"calls for early rate hikes.

In fact the Bank of England could lower its threshold. But doing so would be "embarrassing" and it would "sorely test the credibility of the framework," writes Hilliard.

Unlike Hilliard, British think tank National Institute of Economic and Social Research (NIESR) believes that the central bank could raise rates in 2015 even if unemployment doesn't fall below 7%. "There may be a sense that consumer spending and possibly house prices are rising in a way that makes an ultra loose policy unnecessary," NIESR director Jonathan Portes told Reuters.

NIESR projects that the unemployment rate will not fall below 7% until 2016. 

Credit Suisse analysts expect the Bank of England to bring forward the time by which it expects the jobless rate to fall below 7% into early 2016 or even 2015. 

"This would reflect the persistently firmer pace of UK GDP expansion; such a shift would most likely be interpreted by markets most likely be interpreted by markets as an indication of when the MPC envisages the first tightening of the policy rate."

But a recent survey of 4,000 people by KPMG showed that only 39% believed a "national economic recovery was underway," reports the Financial Times, while  38% said they saw no recovery.

On November 7, the Monetary Policy Committee (MPC) chose to keep rates at a record low of 0.5%, which is where they have been since March 2009. It also kept its £375 billion asset purchase program unchanged.



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