Bank Of England Holds-em

Jeannie Matthews
May 12, 2018

The Monetary Policy Committee (MPC) voted 7-2 to keep rates at 0.5% following the shock slowdown in growth to 0.1% in the first quarter (Q1) as the impact of the Beast from the East compounded woes in consumer and construction sectors.

The Committee (MPC) also voted unanimously to maintain the stock of United Kingdom government bond purchases, financed by the issuance of central bank reserves, at £435 billion (over $588 billion).

Dipanjan Roy, senior investment strategist at Prudential UK, said his firm's view "has always been that the UK has entered a lower long-term growth environment since the Brexit referendum and we do not believe that the UK economy will be strong enough for the BoE to hike rates as quickly as the market was anticipating".

"Furthermore, the Bank was relatively sanguine on the softer wage growth to date emphasizing the continued erosion in slack, which will lift inflation in the forecast horizon". Add in an (un) healthy dose of Brexit uncertainty, and the chance of a rate hike had dwindled to just 8% at the start of this week.

"As Governor Carney stated in his remarks in an interview in April, the MPC is, "conscious that there are other meetings over the course of this year" and although the consensus view has been that a hike would come with an inflation report, this does not have to be the case".

The move follows experts widely predicting that base rate would rise this May.

Mr Carney said the bank's nine-member rate-setting body thinks the "underlying pace of growth remains more resilient than the headline data suggest", according to AP.

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Global growth was strong and the United Kingdom economy was caught in its positive tailwind.

This would suggest that policymakers don't have any more of a clue about what is happening in the United Kingdom economy than they had three months ago, and appear to be trying to fine tune their data on a month on month basis. Inflation was seen dropping to 2.1 per cent in a year's time, and returning to target a year later - sooner than previously thought - but only if interest rates rose by 25 basis points about three times over the next three years, as markets expect.

UK March production data came in near expectations, with industrial output rising 0.1% month over month, the same as the month prior, and expanded by 2.9% year over year after 2.1% year over year in February.

This was partly due to Governor Mark Carney being cast as the "unreliable boyfriend" by critics.

Just a month ago a rate hike from 0.5% to 0.75% seemed a near certainty, but poor United Kingdom economic data in recent weeks, as well as a dovish speech from Governor Mark Carney, dampened expectations for any movement in policy. But very weak UK GDP growth figures and fast-retreating inflation has seen a rapid reversal of the Old Lady's increasingly unhelpful forward guidance.

The Bank of England has put back plans for an increase in interest rates after the weaker-than-expected performance of the economy in early 2018.

In the updated forecasts, the United Kingdom central bank sees growth at 1.4 percent this year, down from 1.8 percent in February.

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