Monday, 28 May, 2018

BOE to hold interest rates at 0.25%

Reuters Reuters
Preston Stone | 04 August, 2017, 00:27

In the U.S., the Federal Reserve is on course to raise short-term rates later this year, while the European Central Bank is to begin phasing out its huge bond-buying programme in 2018.

All eight members voted to maintain the quantitative easing at GBP 435 billion.

Speaking at an event organised by Fathom Consulting, Sir John highlighted that the Bank has already reversed measures implemented in the wake of the Brexit vote that were created to free up lending to the economy.

Sterling has retreated from early gains after the Bank of England cut United Kingdom growth forecasts and warned households' disposable income will decline next year, while the Monetary Policy Committee (MPC) voted to hold rates at 0.25%. Net trade is bolstered by strong global growth and the past depreciation of sterling.

While Carney and the MPC will likely take the risk of letting the economy run too hot during this delicate Brexit transition period, the bank's capacity to surprise shouldn't be underestimated.

Inflation is expected to peak at around three per cent in October, despite the recent fall in inflation in June to 2.6 per cent.

Currently, inflation is running at 2.6%, while wage growth is just above 2%, meaning that regular Brits are now bringing in less in wages than prices are growing, effectively lowering their real incomes.

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While a gradual pick-up in investment will eventually offset that fall, Carney noted it expects the level of investment in 2020 to be 20 per cent lower than the Bank's pre-referendum forecasts.

The latest Inflation Report from the Bank of England made for some glum reading for sterling bulls, although the weakening in the pound helped to propel the FTSE 100 to its highest level since 26 July.

Overall, the market was willing to accept an earlier rate rise, but the glum outlook for growth and wages has weighed heavily on the pound. In addition, margins in the consumer sector, having been squeezed by the pickup in import prices, are projected to be rebuilt. At the end of June he sounded hawkish and said that he wouldn't tolerate above target inflation indefinitely, which triggered the move above 1.30 in GBP/USD.

Average earnings growth is also predicted to be 2% in 2017, unchanged from May's forecast.

The Bank minutes said: "GDP growth had been sluggish and was expected to remain so in the near term". Monetary policy cannot prevent the weaker real incomes likely to accompany the move to new trading arrangements with the European Union, but it can influence how this hit to incomes is distributed between job losses and price rises.

MPC members judged that inflation was not far enough above target to warrant an increase in rates, noting that "attempting to offset fully the effect of weaker sterling on inflation would be achievable only at the cost of higher unemployment and, in all likelihood, even weaker income growth". "That. could have consequences for monetary policy, depending on the evolution of demand".

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