BOE Keeps Interest Rate on Hold as Inflation Seen Cooling Faster

The week’s main United Kingdom economic event will come at noon today, when Bank of England (BoE) policymakers will hold their high-impact monetary policy meeting.

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.

“In that kind of environment, interest rate differentials will end up being the main driver for the dollar”, she said. However, recent activity has seen both two-year fixed mortgage rates and certain savings rates move upwards, so it seems that neither group will have much to cheer or cry about.

What was of more interest was the cut in forecasted GDP, from the previously expected 1.8% growth over 2018 to a more modest 1.4%.

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. With UK inflation still comfortably above target, the Bank of England, in our view, remains committed to a tightening cycle and is keeping its options open for a hike in August. The inflation rates of the most import-intensive components of the CPI appear to have peaked.

Those expectations were correct, with the BoE’s nine-member Monetary Policy Committee voting 7-2 to leave policy unchanged.

The BoE raised rates for the first time in more than a decade in November, reversing an emergency cut made after June 2016’s Brexit vote.

It expects the Office of National Statistics to revise up its Q1 growth figure eventually.

Markets anticipate three rate rises over the next three years and the Bank has not indicated that this expectation is mistaken.

The pound, which had risen to a high of nearly $1.44 on the expectation of a May rate hike, fell close to $1.35 on the decision, remaining there till markets closed.

Economists think it will trim its comparatively high growth and inflation forecasts for this year, but still forecast inflation above its 2 percent target over the medium term and economic growth of around 0.4 percent a quarter.

The UK jobless rate is tipped to rise from 4.2% to 4.3%; such a result could add to the worries of Pound traders and cause greater GBP/ZAR exchange rate losses.

“If the forecasts are right then expect interest rates to remain lower for longer as United Kingdom growth lags the rest of the world, inflation subsides and Brexit clouds remain”.

The slowdown in the first three months of the year was one of two reasons why the Bank stayed pat.

He said yesterday that the bank’s earlier guidance on tighter policy had been conditioned on February inflation projections but the economy had not fulfilled those conditions.

Carney defended himself against that charge, arguing that when the situation changes, the bank’s policy response has to change.