Interest rate rise still in doubt in 'robust' UK economy

A sluggish global economy as a result of the slowdown in China has pushed back the prospects of an interest rate rise in the UK, the Bank of England has said.

Canary wharf
Mark Carney, the bank's governor, had previously suggested the rise from the record low of 0.5 per cent could come early in 2016 and Janet Yellen, chair of the Federal Reserve, said only this week that a US rate rise in December remained a "live possibility."But Mr Carney said at a press conference following an 8-1 vote by the bank's Monetary Policy Committee (MPC) to keep the base rate on hold, that there was only a "reasonable expectation" there would be a rise within the coming year."We are in a situation where we have resilient domestic demand and, even in the face of global weakness, we still see the need for gradual interest rate rises to bring inflation back to target," he added.The pound fell against both the dollar and euro in the wake of the remarks and after the bank's inflation forecast said that the UK rate was expected to stay below one per cent until the second half of next year and would not reach its two per cent target until 2017.Mr Carney said that although the UK's economy was "robust," he was downbeat over the prospects in emerging markets in the wake of the Chinese slowdown. As a result of the uncertain global outlook, the bank cuts its growth forecast for the UK from 2.8 per cent to 2.7 per cent this year, and from 2.7 per cent to 2.5 per cent in 2016.In a letter to Chancellor of the Exchequer George Osborne explaining why the inflation rate was still below the two per cent target, Mr Carney said, "The single most important reason for below-target inflation remains the sharp falls in energy prices since the middle of last year."Oil prices have fallen further over the past three months and in September they were around half the level of a year earlier. In the absence of further falls in commodity prices, inflation rates close to zero are unlikely to endure much beyond the end of the year."Paul Diggle, an economist with Aberdeen Asset Management, said the MPC's apparently relaxed attitude towards an interest rate rise showed that the bank was "a lot more dovish" on the issue than people had been expecting."That magic first rate rise has been kicked into the long grass once again. Only a few months ago, the bank was saying that inflation wasn't picking up because of the low oil price. Now it's emerging markets. You have to wonder what their next reason will be," he said.But Howard Archer, chief UK and European economist at IHS Global Insight, said he still believed a rate rise could come sooner than markets expected."A summary of our view would be that the first interest rate hike from 0.50 to 0.75 per cent is still most likely to happen in May 2016 - but the risks now seem to be that the increase could be later than this rather than before it," he said.James Knightly, an analyst at ING, added, "We remain comfortable with our view that they will start tightening in the second quarter of 2016 - after the Federal Reserve, but well ahead of market expectations."For more Re:locate news and features on corporate finance, click here and for more on employee finance, click here