GBP: Implications of permanently low interest rates by BoE – HSBC

By FXStreet FXStreet (Delhi) – Simon Wells, Chief UK Economist at HSBC, suggests that the implications of low interest rates of UK will result in the fact that real interest rates may be permanently lower with huge implications for growth and monetary policy and the team now forecast a slower pace of tightening.

Key Quotes

“The evolution of the natural real rate of interest – the real interest rate that would keep inflation stable and output at its potential – will be crucial in determining the path of policy rates. Regardless of when the tightening cycle begins, the path of rates will depend partly on how quickly the current natural interest rate reverts to its long-run level.”

“Most estimates put the current natural real interest rate around zero. The BoE’s latest forecast implies little change in this rate between now and 2018. Given that natural interest rates and economic growth are determined by similar factors, this forecast suggests headwinds to growth. Yet the BoE’s growth forecasts remain above trend through this period. Squaring this is hard: either policy rates will rise faster than the market currently expects or the BoE’s growth forecasts will have to be pared back, perhaps substantially.”

“Even when the natural real …read more

Source:: FX Street