Economists: Prudential moves are likely to delay Bank of England interest rate hikes
The Bank of England’s decision to raise interest rates is likely to be delayed by actions undertaken by the relatively new committee that focuses on financial stability.
The financial policy committee (FPC) can impose restrictions on particular markets such as residential or commercial property markets, and can also make banks hold more capital.
The monetary policy committee (MPC) adjusts interest rates to control inflation. “They’re interlinked in many ways, the decisions of the FPC and the MPC, and to some extent, the more the FPC curtails expansionary pressure in asset markets, the less the MPC has to do,” Charles Goodhart, a founding member of the MPC, told City PM
“If an FPC decision has an effect that dampens construction and investment in housing and in commercial real estate, it will effect the overall rate of growth in the economy, it will effect the labour market and also inflationary expectations.”
Yet Goodhart, who is now at the London School of Economics and a consultant to Morgan Stanley, believes rates will go up at some point.
"It's a question of when, not whether. And nobody knows the answer to when," he said.
Most economists are betting on 2017. Economist Brian Hilliard from Societe Generale recently said that moves from the FPC might prevent any future rate hikes during the current phase of growth.
A cut is also on the table if the UK votes to leave the EU this year, said David Owen, an economist at investment bank Jefferies.
“If you get a Brexit a story, rates could be cut and we would not be raising rates for even longer,” he told City PM “But if you’re thinking over two to three years, what the FPC does surely has a bearing on what the MPC does.”
Owen would not be surprised to see the FPC act to cool activity in the buy-to-let and commercial real estate markets soon, given recent comments from Bank officials. He also said many market participants are yet to grasp the full importance of FPC comments and decisions.
Market expectations for the first interest rate hike have shifted dramatically since the start of the year. They now point to 2019. However, some experts believe this is not a true reflection of market expectations. The so-called yield curve, which is used to gauge market expectations, is very flat. This means that factors not reflecting interest rate expectations will have a bigger impact on the projected timing for the first interest rate hike than they normally would.