The main message of today’s Inflation Report is that the Bank of England won’t be lifting interest rates anytime soon. It more or less endorsed market expectations for future changes in borrowing costs which means, all else being equal, interest rates should be going up some point early in 2015. This may or may not be before the General Election – trying to pin that down is a mug’s game at this point, but it could be close (my hunch, for what it’s worth, is that it’ll be before).
However, the supplementary message is that when rates do rise, it’ll happen very gradually (at present markets don’t expect them to get past 2% until 2017). And they won’t get high for a long, long time. Indeed, while before the crisis a “normal” level for rates might have been 5%, the “new normal” is likely to be closer to 2.5% – certainly for as long as Mark Carney is in office (until 2018).
The Bank’s relaxed attitude towards interest rates comes in spite of its forecast that 2014 will be a boom year for the economy. It lifted its forecast for economic growth this year from an already punchy 2.8% to a near-breakneck 3.4%. Not only is that the strongest annual growth rate since 2007, the year before the bust, it’s also notably imbalanced. Much of the growth comes courtesy of consumer spending and the housing market – not the manufacturing and export sectors which have provided so little impetus in recent years.