Bank of England to Keep Policy Hold Until Mid-2020, Niesr Says

(Bloomberg) -- The Bank of England is likely to hold off raising interest rates until 2020, according to the National Institute of Economic and Social Research.

Though there are signs that inflationary pressures are building, consumer prices will stay around the central bank’s 2 percent target and sluggish global growth will encourage officials to maintain an accommodative stance, the think tank’s economists told reporters in London on Wednesday. They previously estimated an increase in bank rate in the middle of this year.

That would mean Governor Mark Carney won’t hike rates again before he leaves. The government on Wednesday said the search has begun for a successor to take over when Carney steps down in January.

The BOE announces its next monetary policy decision on May 2, and it will also update its forecasts for growth and inflation. With the U.K.’s deadline for exit from the European Union delayed until October, most economists expect the bank to keep policy unchanged until there’s more clarity. Still, accelerating wage growth -- close to an 11-year high -- could be worrying some officials.

“We now expect the first increase in bank rate to be next August instead of this August,” said Garry Young, director of macroeconomic modeling and forecasting at Niesr. “There is some limited evidence of domestically generated inflationary pressure, because we have annual unit labor cost growth of about 3 percent. But we’re not too concerned about the impact of that on CPI inflation because that’s being offset by lower import price inflation.”

Niesr lowered its growth forecasts slightly for this year and next, and said the expansion will remain around its 1.5 percent potential. Inflation will probably be 1.8 percent this year and 1.9 percent next, the think tank said in a report. The estimates are based on a smooth exit from the EU where the Irish border stays open and there’s a high level of market access between the U.K. and the continent.

Niesr also said that the government’s current fiscal plans are not credible, and that borrowing will likely rise more quickly than planned over the coming years.

Pressure is gathering on Chancellor of the Exchequer Philip Hammond to end austerity, especially after figures published this week showed that the government is borrowing less than at any time since the turn of the millennium.

To contact the reporter on this story: Jill Ward in London at jward98@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Brian Swint, David Goodman

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