Mark Carney, governor of the Bank of England.
Osborne’s pledge to continue tackling the budget deficit means the onus remains on the Bank of England governor and his colleagues to drive economic growth. Tight government purse strings, along with the shackles of a struggling euro area, spurred the Monetary Policy Committee to keep the key interest rate at a record-low 0.5 percent today.
“The fiscal numbers aren’t doing an awful lot to stimulate the economy,” Peter Dixon, an economist at Commerzbank AG in London, said before the decision was announced. “The MPC will have to do a lot of work, but I guess that’s the compact which the two sides implicitly agreed to -- the government gets the deficit down and the bank does what it can to stimulate the recovery.”
With a general election in five months, Osborne is looking to
entice voters with his approach to fiscal responsibility, while the MPC has highlighted the drag from deficit-reduction plans. Also at the forefront of Carney’s concerns is the weakness in the euro area, where European Central Bank policy makers led by Mario Draghi are debating if they need to pump even more stimulus to resuscitate the economy.
With a general election in five months, George Osborne, U.K. chancellor of the... Read More
Warning Lights
Economists in Bloomberg’s monthly survey expect the BOE to keep the key rate unchanged until at least the second quarter, while Sonia forwards are only fully pricing in a quarter-point increase by the end of next year.While Britain’s economy has grown for seven straight quarters and unemployment has fallen, Carney has highlighted the risks from overseas. That was echoed by Osborne in his end-of-year statement to Parliament yesterday, when he said “warning lights are flashing over the global economy.”
In addition to global pressures, U.K. growth is being restrained as sluggish wage growth undermines spending at home. Austerity was one of the headwinds cited by policy makers in the minutes of their November policy meeting. Officials said there was a question whether private domestic spending would remain strong enough “to offset the contractionary influences of the fiscal consolidation and subdued external demand.”
In his Autumn Statement, Osborne offered pre-election sweeteners such as a revamp of the tax on buying houses and higher levies on multinational companies, though he had little room for maneuver. The budget deficit is forecast to be 5 percent of output this year.
Budget Squeeze
“The U.K. is still only halfway down the road to achieving sustainable public finances and the fiscal squeeze will intensify again,” said Samuel Tombs, an economist at Capital Economics Ltd. in London. “The burden will remain squarely on the shoulders of the MPC to mitigate the impact.”The U.K. economy will grow 3.5 percent this year and 2.9 percent in 2015, according to the BOE. At the same time, a drop in commodity prices and low inflation are easing a squeeze on consumers and may support spending. Recent surveys by Markit Economics have indicated continued momentum, with growth in manufacturing and services accelerating in November.
U.K. property-price growth is continuing, albeit at a more moderate pace. Values in the quarter through November rose an annual 8.2 percent in a fourth consecutive slowdown, Halifax said today.
Countering that are the clouds in Europe, where Markit’s surveys point to a weakening outlook and an economy that is drifting closer to deflation.
That’s giving weight to the majority on the nine-member MPC against the two officials who favor a rate increase. Minutes of this week’s meeting, showing how the panel voted, will be published on Dec. 17.
“Generally the doves are in the stronger position,” said George Buckley, an economist at Deutsche Bank AG in London. “What’s most important is where Europe is. The PMIs are quite a concern. It may have some implications for exports.”
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