Bank of England Puts Off Interest Rate Rise

12 May, 2018, 07:41 | Author: Terri Saunders
  • Mark Carney

The BoE has already revised down its forecasts for 2018, said it expected economic growth would increase over the course of the year.

Sterling weakened after the Monetary Policy Committee surprised economists who were expecting a "hawkish hold" on policy, by cutting its forecasts for near-term growth in the United Kingdom economy and for inflation. "Taking external and domestic influences together, CPI inflation is projected to fall back slightly more quickly than in February, reaching the target in two years".

The BOE isn't the only central bank to wobble on the exit ramp from the easy money of the past decade, even as the U.S. Federal Reserve sticks to its plan to gradually raise rates.

Sterling steadied in early trade, having fallen to a four-month low against the dollar on Tuesday, as markets priced diverging prospects for growth and interest rates on the two sides of the Atlantic.

As The Bank of England Governor Mark Carney explained during the press conference, that the United Kingdom households and business all expect the Bank rate to rise slightly in three-year time, but they all are more anxious about the actual outcome of the Brexit negotiations as the future path for the policy rate will be up, with move only gradual and limited. But growth was weakest in Britain, where - less than a year before it is due to leave the European Union - Brexit-related pressures have squeezed consumer spending power and hurt firms' willingness to sign off on major investments.

Recent data "had been consistent with a temporary soft patch", most of the BoE's rate-setters said.

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Minutes of the meeting showed that most MPC members now wanted to wait to see "how the data unfolded" over the coming months. In the weeks leading up to the actual decision, there had been some speculation that the Bank would act to tighten monetary policy on the back of Governor Mark Carney's comments, but it has been odds on for some time that the MPC would delay a rise until (probably) August.

However, JP Morgan economist Allan Monks said the BoE had sent a "muddled message" about its intentions.

The dire performance saw the Bank downgrade its 2018 growth forecast to 1.4%, from 1.8% predicted in February, though forecasts remained unchanged at 1.7% in 2019 and 2020.

On growth, the BoE said "very little spare capacity remains in the economy", which grew only 0.1% in the first quarter, down from 0.4% in the fourth quarter of 2017, hampered by poor weather.

With the United Kingdom inflation decelerating toward the target more quickly than expected in February and the GDP growth slowing down sharply at the beginning of this year, it was no surprise from the Bank of England to keep the Bank rate at the unchanged level of 0.50 percent in May.

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