Doubts over just how soon the Bank of England can raise interest rates have been growing in recent weeks as Britain’s recovery looks in danger, inflation remains stubbornly low and concerns about the euro zone intensify.
For all of the flip-flopping in sterling markets in recent months over when the Bank of England will finally lift interest rates off their lowest floor in more than 300 years, the consensus view among forecasters has been remarkably stable.
Bank of England rate setters meeting this week should be in cordial agreement that Britain’s economy is growing at a decent pace, and that price pressures look mostly in check at the moment.
When the Bank of England decides to start hiking interest rates, it may find that its standard 25 and 50 basis point interest rate moves of old are too blunt a tool for Britain’s delicately-poised economic recovery.
Britain’s economy is steaming ahead – by one measure faster than any other large developed or emerging economy – but history suggests it will struggle to sustain the rapid growth indicated in business and confidence surveys.
Central banks in Europe have followed in the Federal Reserve’s footsteps by adopting “forward guidance” in a break with tradition. But, as in the Fed’s case, the increased transparency seems to have only made investors more confused.
As is now customary for retiring central bank chiefs, Bank of England Governor Mervyn King has received a warm – but not a standing – ovation from economists for his time in charge.