NIESR: BOE Hike Q1 2018; Wants Policy Normalisation Debate

NIESR Forecasts UK GDP 1.7% In 2017; 1.9% in 2018

--UK CPI Peaks At 3% In Q4 2017

By David Robinson

     LONDON (MNI) - The UK's National Institute of Economic and Social Research

forecast that the first Bank of England rate hike will come in the first quarter

of next year and called on the Monetary Policy Committee to open up a debate on

policy normalisation.

     In August 2016, in the wake of the vote to leave the European Union, the

MPC opted for a set of stimulus measures comprising a 25 basis point cut in Bank

Rate, a Term Funding Scheme and the purchase of a further stg60 billion of gilts

and stg10 billion of corporate bonds. With the economy expected to continue to

expand and inflation to hold above target, NIESR said that the MPC should

partially reverse the August stimulus. 

     "We are not saying that they should withdraw that stimulus today but should

withdraw some of that stimulus in six to eight months' time," Amit Kara, head of

UK macroeconomics at NIESR, said.

     MPC members Ian McCafferty and Michael Saunders both voted at the June MPC

meeting for a rate hike. The gloomier predictions of the impact on the economy

of the UK vote to leave the EU have not yet materialised and Kara argued that

while the August stimulus was justifiable as a precautionary measure the time

was coming to remove some of it. 

     NIESR director Jagjit Chadha said "it may be the appropriate time to start

the debate in the UK as to how we normalise."

     A one-off 25 basis point rate hike, lifting Bank Rate to just 0.5%, would

risk creating confusion unless the MPC was prepared to spell out how it believed

policy was going to return to more normal settings.

     "We think that the groundwork for a fuller normalisation of policy has yet

to be laid," Chadha said.

     The BOE is sitting on a vast pile of asset purchases, having bought almost

stg435 billion of gilts, stg10 billion of corporate bonds and lent stg78.3

billion through the Term Funding Scheme. The MPC's current guidance that it will

not start asset sales until Bank Rate is hiked to a level from which it can be

substantially lowered, which the committee has put at around 2%.

     Chadha proposed having MPC members publish their own policy forecasts,

including their expectations for rate hikes and if and when asset sales would

start. 

     Market curves show Bank Rate is not expected to get back up to 2% within

the MPC's usual three year forecast horizon, so the MPC is currently offering no

time guidance on asset sales and no likely path for Bank Rate hikes.

     NIESR predicted UK growth would pick-up somewhat after a weak first half of

2017, with growth increasing by an unrevised 1.7% in 2017 and 1.9% in 2018. It

forecast CPI inflation would peak at 3% in the final quarter of this year before

falling back to the 2% target set for the MPC in the final quarter of 2019.

     This UK growth would come against a backdrop of stronger global growth,

with NIESR forecasting world GDP growth of 3.6% in 2017, the fastest pace for

six years. NIESR expected world growth to hold at 3.6% in 2018.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

[TOPICS: M$B$$$,M$E$$$,M$$BE$]