If Mark Carney has any New Year resolutions on interest rates, Thursday is his moment to share them.
As the Bank of England edges toward its first policy tightening in more than eight years, economists and investors are at odds about when it will actually come, with February seen as the earliest opportunity. At his final Inflation Report press conference of the year, the governor has a chance to fix that when he presents new economic forecasts which will be scoured for clues on the timing.
“It’s make or break for clear communication on a first-quarter rate increase,” said Brian Hilliard, chief U.K. economist at Societe Generale SA in London and a former BOE official. “If it is going to happen in February they’re going to have to send a strong and clear signal.”
Officials are balancing weak inflation against a resilient domestic economy and will probably keep their key rate at a record-low 0.5 percent. While the Monetary Policy Committee probably voted 8-1, some economists predict that a second official joined Ian McCafferty’s push for higher rates.
The decision, forecasts and vote split will be published at noon in London. Carney, who’s said the timing of when to tighten will become clearer around the turn of the year, will present the outlook 45 minutes later.
A factor holding back some officials is the inflation rate, which is below zero and well off the BOE’s 2 percent target. The deviation from the goal — driven largely by energy prices — will require Carney to write a letter to Chancellor of the Exchequer George Osborne.
Complicating the picture is the divergence in the policy outlooks in the U.S. and euro area. Federal Reserve Chair Janet Yellen said Wednesday that a December rate increase in America, which many investors see as a precursor to liftoff by the BOE, is a “live possibility” if economic data remain strong. On the other side of the Atlantic, European Central Bank President Mario Draghi has said the need for more stimulus to combat price weakness is an “open question.”
Price growth has been elusive in the U.K. While officials will probably lower their projection for inflation in the near term on Thursday, the main focus will be on how fast they see it getting back to their goal.
“The key element will be the trajectory,” said Mike Amey, a money manager at Pacific Investment Management Co. in London. “The speed with which the inflation rate goes back to 2 percent and what happens after that is an indication of how quickly the MPC think policy needs to tighten.”
Economists currently see either February or May as likely months for the first rate increase, since these are when the central bank updates its projections. Investors are more dovish, betting on a 25 basis-point hike in November 2016.
In August, the central bank said inflation would be above its goal in three years, a sign that rates would need to rise. Should the MPC lower its projection for this year and next, while keeping its estimate further out the same, it might be interpreted as a sign it feels less pressure to increase borrowing costs in the near term.
With recent manufacturing and services surveys indicating a pick up in activity in October, another MPC member may have been persuaded to join McCafferty in voting for a rate increase this month. Some economists forecast a 7-2 vote, with the most cited candidates being Martin Weale and Kristin Forbes.
“We suspect at least one other MPC member joined Ian McCafferty,” said James Knightley, an economist at ING Bank NV in London. “With Mark Carney continuing to suggest that the decision whether to raise rates or not will come into ‘sharper relief’ for him around the turn of the year, we favor May as the start point for rate rises — after the Federal Reserve, but well ahead of current market expectations.”