Britain's interest rates will rocket to a 'new normal' of 3%

Britain is on the cusp of a rise in interest rates because the economy has significantly recovered since rates were slashed to record lows of 0.5% in March 2009. Now, a second member of the Bank of England's rate setting panel – the Monetary Policy Committee – has come out this week to warn that interest rates will rise "pretty soon." He added that when rates start to rise, they will eventually rest around a "new normal" of 2.5% to 3%. "I don't think it's anything to worry about, it's a sign of health," said Professor David Miles on BBC's Newsnight programme. "Within the UK economy consumer confidence is strong, corporate confidence is pretty strong and the financial system is operating near normal now." However, he didn't say a month or year for when rates are likely to rise. He said that a hike would depend on economic data. A low interest rate stimulates the economy  because it reduces the cost of borrowing. In other words, it helps those in debt to make repayments and boosts the amount of money in people's pockets. This was necessary when the economy was hit by the credit crisis on 2007/2008. However, the UK economy has expanded since then and latest data from the Office for National Statistics shows that the UK economy was 2.6% larger in the second quarter (April to June) in 2015, compared to the same quarter a year ago. It also revised up its forecasts for the expansion of the British economy this year.  For this reason, another member of the MPC, Kristin Forbes, warned that the central bank must hike rates soon or face damaging the progress Britain has made over the last few years. "An increase in interest rates is generally believed to take somewhere from one to two years to have its maximum impact. Maintaining interest rates at the current low levels during an expansion risks creating distortions," said Forbes, a member of the 9-strong rate setting Monetary Policy Committee, in a column for the Telegraph newspaper. "Therefore, interest rates will need to be increased well before inflation hits our 2% target. Waiting too long would risk undermining the recovery – especially if interest rates then need to be increased faster than the gradual path which we expect. But with inflation starting from about zero today, there is no need to act before we are confident that inflation is heading back toward 2% within about two years as expected." At the beginning of August, only one member of the MPC voted to increase interest rates to 0.75%. The remaining eight members of the MPC voted to hold the BoE’s benchmark interest rate at 0.5%.Join the conversation about this story » NOW WATCH: 6 mind-blowing facts about Greece's economy

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Lone Bank of England official votes to raise rates, others unrushed

By William Schomberg and David MillikenLONDON (Reuters) - The Bank of England appeared in no rush to start raising interest rates on Thursday, with minutes showing just one top policymaker voted to do so this week while the bank forecasts only a slow pick-up in inflation, which sits at zero.Sterling fell to its lowest in nearly two weeks against the dollar, while British government bonds rallied.BoE Governor Mark Carney reiterated that the time for an interest rate hike is drawing closer."However, the exact timing of the first move cannot be predicted in advance; it will be the product of economic developments and prospects. In short, it will be data dependent," Carney said in a news conference.Three weeks ago, Carney said the decision when to hike interest rates would likely come into "sharper relief" around the end of the year. He emphasized on Thursday that this was his own view and that it had not changed since.Most economists taking part in a Reuters poll had expected two or even three members of the Monetary Policy Committee to vote for a rate hike. Markets pushed out their bets on when the BoE would start to raise rates to June next year from May.In the end, only Ian McCafferty wanted to hike rates at the August meeting which ended on Wednesday, resulting in an 8-1 vote in favor of keeping rates at their record low of 0.5 percent, the BoE said.BNP Paribas economist Dominic Bryant said expectations that the BoE could move as soon as this year now looked a stretch, though a move in February was still a possibility.The MPC had previously maintained a united front on rates since January, after a fall in oil prices last year set back the prospects of the first rate rise since 2007.Few economists expect the BoE to tighten policy before the United States Federal Reserve, which is expected to raise rates later this year.The bank said it expected inflation to be back to its 2.0 percent target in two years' time, in line with its previous forecast made in May despite a renewed plunge in oil prices and a strengthening of sterling in the last three months."The most striking development in the UK over the past year has been the fall in CPI inflation, which edged back down to zero percent in June," Carney said at his news conference.The bank said its forecasts were based on bets in financial markets that interest rates would only start to rise in the second quarter of next year. Economists mostly expect a first rate hike in February.The strong pound and low fuel costs would continue to push down inflation until at least the middle of next year, the bank said.Minutes of the bank's monthly meeting showed "some members" saw a risk the inflation could pick up more strongly than the central forecast.But the overall tone of the minutes and the bank's quarterly economic forecasts - which were released together for the first time - suggested the central bank was focused on the potential for the surge in sterling to keep a lid on inflation.Stock market turmoil in China and Greece's unresolved debt problems cast a small shadow on the global economic outlook, the BoE said.The BoE also noted that Britain's weak productivity growth was finally on the rise, which would also help mute inflation even after wages grew surprisingly strongly in recent months.It noted a fall in employment but said it was unclear if this reflected slower demand or an increased difficulty in employers finding qualified workers.The bank raised its forecasts for Britain's overall economic growth this year to 2.8 percent from 2.5 percent in its May forecasts but kept its growth projections for the following years largely unchanged.McCafferty had voted to raise rates in late 2014, along with fellow MPC member Martin Weale. But minority support for a change in policy at the BoE rarely translates rapidly into a shift in the majority's view.Carney said last month that the decision on when to raise interest rates would only come into sharper focus around the turn of the year.(Editing by Hugh Lawson)Join the conversation about this story »

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Lone Bank of England official votes to raise rates, others unrushed

By William Schomberg and David MillikenLONDON (Reuters) - The Bank of England appeared in no rush to start raising interest rates on Thursday, with minutes showing just one top policymaker voted to do so this week while the bank forecasts only a slow pick-up in inflation, which sits at zero.Sterling fell to its lowest in nearly two weeks against the dollar, while British government bonds rallied.BoE Governor Mark Carney reiterated that the time for an interest rate hike is drawing closer."However, the exact timing of the first move cannot be predicted in advance; it will be the product of economic developments and prospects. In short, it will be data dependent," Carney said in a news conference.Three weeks ago, Carney said the decision when to hike interest rates would likely come into "sharper relief" around the end of the year. He emphasized on Thursday that this was his own view and that it had not changed since.Most economists taking part in a Reuters poll had expected two or even three members of the Monetary Policy Committee to vote for a rate hike. Markets pushed out their bets on when the BoE would start to raise rates to June next year from May.In the end, only Ian McCafferty wanted to hike rates at the August meeting which ended on Wednesday, resulting in an 8-1 vote in favor of keeping rates at their record low of 0.5 percent, the BoE said.BNP Paribas economist Dominic Bryant said expectations that the BoE could move as soon as this year now looked a stretch, though a move in February was still a possibility.The MPC had previously maintained a united front on rates since January, after a fall in oil prices last year set back the prospects of the first rate rise since 2007.Few economists expect the BoE to tighten policy before the United States Federal Reserve, which is expected to raise rates later this year.The bank said it expected inflation to be back to its 2.0 percent target in two years' time, in line with its previous forecast made in May despite a renewed plunge in oil prices and a strengthening of sterling in the last three months."The most striking development in the UK over the past year has been the fall in CPI inflation, which edged back down to zero percent in June," Carney said at his news conference.The bank said its forecasts were based on bets in financial markets that interest rates would only start to rise in the second quarter of next year. Economists mostly expect a first rate hike in February.The strong pound and low fuel costs would continue to push down inflation until at least the middle of next year, the bank said.Minutes of the bank's monthly meeting showed "some members" saw a risk the inflation could pick up more strongly than the central forecast.But the overall tone of the minutes and the bank's quarterly economic forecasts - which were released together for the first time - suggested the central bank was focused on the potential for the surge in sterling to keep a lid on inflation.Stock market turmoil in China and Greece's unresolved debt problems cast a small shadow on the global economic outlook, the BoE said.The BoE also noted that Britain's weak productivity growth was finally on the rise, which would also help mute inflation even after wages grew surprisingly strongly in recent months.It noted a fall in employment but said it was unclear if this reflected slower demand or an increased difficulty in employers finding qualified workers.The bank raised its forecasts for Britain's overall economic growth this year to 2.8 percent from 2.5 percent in its May forecasts but kept its growth projections for the following years largely unchanged.McCafferty had voted to raise rates in late 2014, along with fellow MPC member Martin Weale. But minority support for a change in policy at the BoE rarely translates rapidly into a shift in the majority's view.Carney said last month that the decision on when to raise interest rates would only come into sharper focus around the turn of the year.(Editing by Hugh Lawson)Join the conversation about this story »

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Interest rate 'dissidents' are growing inside the Bank of England

Dissent against a persistently low interest rate policy is growing inside the Bank of England. And this could lead to a split vote at the central bank's Monetary Policy Committee meeting next month, according to a note from Barclays analysts. A subtle change in the wording in the minutes of the last meeting this month is the key. All nine MPC members voted to keep rates at 0.5, where they've been since March 2009, at a July 8 meeting, with the "dissidents" held back by fears the Greek economic crisis could spill over and hit UK growth. But more members are having doubts. "By dropping the reference to only 'two members' for whom the decision was 'finely balanced', and replacing it with 'For a number of members,' the minutes suggest that the group of ‘dissidents’ has grown," according to the Barclays note. The so-called dissidents believe that growing wages and falling unemployment could see the Bank of England overshoot its 2% inflation target if action on rates is taken too late. "We believe that David Miles or even Kristin Forbes, who have been recently expressing optimistic if not bullish views on the UK economy, could have joined Martin Weale and Ian McCafferty in favouring an early rate hike," Barclays said. "Support for a hike will likely continue to build as the year-end approaches, leading, we believe, to a hike in February 2016." That said, when it does happen, it's likely to just be a 25 basis point hop, Barclays said, rather than a hike.Join the conversation about this story » NOW WATCH: 50 Cent testifies his lifestyle is an illusion

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Bank of England warns Greek debt crisis could delay interest rate rise

Bank of England policymakers are concerned that the Greek debt crisis could delay Britain's first interest rate rise in eight years, but warned that the ...

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