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NIESR: BOE Hike Q1 2018; Wants Policy Normalisation Debate

MNI (London)
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$]
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com

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