EU referendum to delay UK rate hike, says National Institute for Economic and Social Research

The Bank of England will keep interest rates on hold until after Britain’s referendum on EU membership, the UK’s National Institute for Economic and Social Research said as it pushed back its forecast on the timing of an increase.

The institute now predicts the Monetary Policy Committee will lift its key rate from a record-low 0.5% in August, six months later than a previous prediction of February.

Niesr also predicted the fall in oil prices will leave UK inflation at 0.3% this year, down from a 1.1% forecast in November.

Bank of England officials announce their latest interest-rate decision later today, when governor Mark Carney is also due to present new economic forecasts. 

While the latest official data showed the economy gained a little momentum at the end of last year, Britain’s upcoming referendum, due as soon as June, is clouding the outlook.

It’s “somewhat implausible they would increase rates just before that,” Niesr economist Simon Kirby told reporters. 

An increase in May would have been consistent with the bank’s inflation target without the referendum, he said, but the MPC will likely wait “so they don’t have to reverse course in the event of an exit vote”.

Niesr forecasts the Bank of England will increase its key rate twice this year, taking it to 1% by the end of 2016, and to 1.5% by the end of next year.

Investors are more pessimistic, not fully pricing in a quarter-point increase until the second quarter of 2018. 

Such a delay would push inflation above the central bank’s 2% target and to 2.6% by 2019, the institute said. 

The market pricing for officials to keep the benchmark unchanged until 2018 is unlikely, Mr Kirby said.

“The argument for delaying monetary tightening hangs predominantly on heightened uncertainty.

“The balancing act facing the committee is how much they can let underlying inflationary pressure build in order to give themselves time to see how these risks play out, especially given the transmission lags inherent once tightening begins.”

The UK will grow 2.3% this year and 2.7% next year, Niesr forecast. It said the global economy will expand 3.2% this year and 3.8% in 2017.

Bloomberg


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