BoE: Interest Rates Unchanged at 0.25%

Mar 17, 8:35 am
Bank of England_Carney_interest rates_1703

Image via Bank of England

The Bank of England’s monetary policy meeting that concluded yesterday saw the central bank leaving interest rates and its asset purchases steady at a pace of 0.25% and 435 billion GBP respectively.

While the policy meeting came out as widely expected, the markets were surprised to see that there was a dissenter from the MPC which split the BoE’s interest rate MPC vote to 8 – 1.

The Bank of England policy member Kristin Forbes was the dissenter who voted for a 25 basis point increase. However, other members of the MPC maintained that it would be appropriate to keep the asset purchases and interest rates unchanged.

Kristin Forbes said that the monetary policy has evolved to warrant an immediate rate hike. She also cited risks from inflation and said that she expects inflation to stay above the central bank’s target rate of 2% for at least the next three years.

“With inflation rising sharply, and only mixed evidence on slowing activity domestically, some members noted that it would take relatively little further upside news on the prospects for activity or inflation for them to consider that a more immediate reduction in policy support might be warranted,” the BoE’s minutes said.

The British pound was seen rising following the comments from the MPC member and the dissenting vote. However, it is unlikely to expect the British pound to maintain gains in the longer run given the broader themes.

The comments, however, come in contrast to data released earlier this week on the labor markets. According to the ONS, the UK’s unemployment rate fell to 4.7%, which was the lowest unemployment rate recorded since 1975.

However, the most important metric that was widely followed, which is the wage growth was disappointing, slowing 2.3% excluding bonuses down from 2.6% registered in the previous three-month period.

UK Average Earnings (March 2017)
UK Average Earnings (March 2017). Source: Office for National Statistics

Although UK wages were increasing above the rate of inflation, the gap has decreased significantly, with inflation recorded at 1.8% and expected to continue to rise even further.

Wage growth has been an important factor for the BoE, and therefore, if the pace of wage growth continues to remain weak, the BoE could send more dovish signals. Thus, the British pound’s rally in reaction to the BoE is quite likely to be short-lived.

There are also other risks from elsewhere, including the Brexit process itself, which got some more clarity yesterday.

UK’s Brexit Bill passes into law

Aside from the Bank of England’s narrative, the UK Government’s Brexit bill received the Royal Assent which now makes the bill into law, formally called the European Union (Notice of Withdrawal) Act 2017.

Following the bill receiving the Royal Asset, the speaker of the House of Commons, John Bercow told lawmakers “I have to notify the House that in accordance with the Royal Assent Act 1967 Her Majesty has signified her Royal Assent to the following Acts… European Union (Notice of Withdrawal) Act 2017.”

With the bill now made into law and having cleared both Houses of Parliament, the UK is now on course to trigger Article 50 of the Lisbon Treaty and will formally be its exit process with the EU.

The passage of the bill seems to have come within the timeline that was outlined by PM Theresa May who had suggested that Britain will be its formal process of invoking Article 50 by end of March.

The bill comes less than a year after the UK referendum held in June last year saw UK voters voting by a majority of 52% – 48% to leave the European Union.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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