Bank of England Leaves Rates Unchanged, GBP Extends Declines

The Bank of England’s monetary policy meeting yesterday saw the central bank’s policy makers keeping the key interest rates unchanged at 0.25% and voting to maintain the bank’s asset purchases at 435 billion GBP and maintaining corporate bond purchases at 10 billion GBP. The central bank’s decision was widely expected by economists polled.

The central bank’s statement showed that all 9 members voted in favor leaving interest rates unchanged, although two members questioned whether the central bank should continue with its asset purchases. Kristin Forbes and Ian McCafferty were the two members who continued to cast doubts on maintaining the asset purchases, which was extended after the UK voted to leave the EU in June. However, both policy makers felt that halting the asset purchases would incur more costs to the economy at this point in time.

The central bank also maintained that inflation is likely to overshoot the bank’s 2% target rate in 2017 and 2018 albeit at a slower pace. The central bank’s meeting comes after last month, the BoE abandoned its dovish views for another rate hike and instead shifted to a neutral stance after it was evident that the impact following the June referendum was less than what it estimated.

The British pound was seen appreciating by 6% since the central bank’s meeting in November where it published fresh economic forecasts.

“(This) would by itself point to less of an overshoot in inflation relative to the target in the medium term, though month-to-month volatility was to be expected as market participants’ views on the United Kingdom’s future relationship with the European Union continued to evolve,” the BoE’s statement showed.

EU exit talks could see BoE stay on the sidelines next year

Earlier this week, latest inflation figures showed that the UK’s consumer price index rose 1.2% on a year over year basis in November. Inflation was seen accelerating in November after briefly rising at a slower pace of 0.9% previously. The central bank would be seen hiking interest rates in light of higher inflation, but it is expected to stay on the sidelines as the UK prepares to resume the EU exit talks starting next year.

British PM Theresa May had previously hinted at Match 2017 as the deadline for triggering the EU’s Article 50 exit clause but this has met with legal hurdles after the government’s decision was challenged. Earlier in December the British government had challenged the high court ruling which ruled that the British government should put the Article 50 to parliamentary approval.

After four days of deliberations and hearing arguments on both sides last week, the UK’s Supreme Court is expected to give its judgment in January. It is widely expected that the judges will be ruling in favor of the Article 50 being put to a parliamentary vote, which could only complicate the Brexit process.

Speaking on the global outlook, BoE policymakers said that in the U.S. the promised fiscal stimulus from President-elect Donald Trump would boost growth if delivered but cautioned the risks of a fragile economic recovery.

The British pound was seen extending the declines to $1.2400 after the BoE’s meeting yesterday as the U.S. dollar continues to post strong gains rising to a 14-month high after the Fed hiked interest rates on Wednesday and signaled three more rate hikes in 2017.