- Reuters/Toby Melville
- The Bank of England leaves interest rates unchanged at 0.5%.
- Just a month ago a rate hike to 0..75% seemed a near certainty, but poor UK economic data all but killed the chance of rates increasing.
- Bank hints at future rate hikes, saying that it is ready to tighten policy going forward, if the economy grows as forecast.
- Pound falls sharply after the decision, before bouncing back as Governor Mark Carney speaks.
LONDON – The Bank of England on Thursday left interest rates unchanged at 0.5%, as had been widely expected by markets and commentators alike.
Just a month ago a rate hike from 0.5% to 0.75% seemed a near certainty, but poor UK economic data in recent weeks, as well as a dovish speech from Governor Mark Carney, dampened expectations for any movement in policy.
Those expectations were correct, with the BoE’s nine-member Monetary Policy Committee voting 7-2 to leave policy unchanged. Ian McCafferty and Michael Saunders, the two most hawkish members of the MPC, voted to increase the rate to 0.75%.
“Not for the first time, Mark Carney’s policy of guiding the markets as to what to expect has backfired. A month or so ago it looked like a May rate rise was a near-certainty,” Ben Brettell, a senior economist at FTSE 100-listed Hargreaves Lansdown said in an email.
In justifying the bank’s decision not to hike interest rates, as had been previously expected, Governor Carney told reporters at a press conference that the economy had not grown as expected since its last meeting.
Heavy snow slowed economic growth in much of Europe in March. Growth was weakest in Britain, where Brexit-related pressures have squeezed consumer spending power and hurt firms’ willingness to sign off on major investments.
Here’s the quote (emphasis ours):
Three months ago, the MPC said that an ongoing tightening of monetary policy over the next few years would be appropriate to return inflation sustainably to its 2% target. That guidance was explicitly conditioned on the economy evolving broadly in line with the Committee’s February Inflation Report projections.
In the period since then, the economy hasn’t fulfilled those conditions. Growth-at 0.1% in the first quarter of this year-was much weaker, and inflation-at 2.5% in March-was notably lower than we had projected in February.
The key question is whether that softness will prove temporary or persistent. In other words, was weakness in the first quarter due to the weather or the climate?
While the bank left rates on hold, it reiterated once again that it is prepared to raise rates in the near future, saying that an “ongoing tightening of monetary policy” will be necessary if the economy grows as forecast.
“The Committee’s best collective judgement therefore remains that, were the economy to develop broadly in line with the May Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target at a conventional horizon,” it said in a summary of the MPC’s meeting.
“As previously, however, that judgement relies on the economic data evolving broadly in line with the Committee’s projections,” it continued, suggesting that if the UK economy remains weak, rate hikes may not be on the table.
Alongside the decisions, the Bank of England also released its quarterly Inflation Report, providing an update on its economic forecasts, predicting that the UK economy will grow at average of around 1.75% over the next handful of years.
There was bad news, however, for 2018, with the bank saying that it expects growth of just 1.4% in the UK this year, compared to 1.8% at its previous forecast. That reflects the soft growth seen at the start of the year.
The pound fell sharply on the news, dropping around 0.8% against the US dollar, having been in positive territory for the day before the announcement. It has since bounced back, reflecting more hawkish comments from Governor Carney in a press conference. Here’s the chart:
- Markets Insider