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BoE signals May rate hike

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The Bank of England’s monetary policy meeting last week saw the central bank leaving interest rates unchanged in a widely expected move. The BoE however signaled that it would stick to its previous plan of another rate hike in the May monetary policy meeting.

The central bank held the interest rates unchanged at 0.50% at the meeting last week. It cited that wages were picking up and sounded confident that inflation which still remains above the BoE’s 2% inflation target rate would ease back after reaching 3% few months ago.

The MPC voting members also voted unanimously to keep the central bank’s asset purchases unchanged at 435 billion GBP. On the interest rates, there were two dissenters while seven members voted in favor of keeping monetary policy unchanged.

At the March monetary policy meeting, there were two members of the monetary policy committee who voted for a 25 basis point rate hike. However, a majority of other MPC voters acknowledged that the ongoing tightening of the monetary policy in the forecast period was the appropriate course to stick to.

The dissenting votes came from MPC members Michael Saunders and Ian McCafferty. The dissent was familiar to the previous meeting in Autumn last year when two dissenting votes paved the way for a rate hike in September.

According to the meeting minutes that was also released, the two dissenters voiced concerns that there was no incentive for the UK’s economy to grow at a faster pace without inflation rising and wage growth picking up.

“A modest tightening of monetary policy at this meeting could mitigate the risks from a more sustained period of above-target inflation that might ultimately necessitate a more abrupt change in policy and hence a greater adjustment in growth and employment,” the dissenters said.

Contrary to the dissenters, the other MPC members said that nothing in the UK’s economy had changed significantly since the February monetary policy meeting that would have justified an immediate move.

However, the members acknowledged that they believe rates would rise faster than expected.

The central bank’s MPC kept its pledge that rate hikes would be gradual and limited. The central bank had previously confirmed that it would hike rates twice this year. The markets have taken the view that the next rate hike will come in May.

The March monetary policy meeting did not surprise this expectation and more likely cemented expectations of a rate hike in May.

In summary, the meeting minutes did not offer any new information for the market participants and only confirmed the central bank’s view from February. The fact that there was a pickup in wage growth as per last week’s labor market data amid falling inflation further strengthened the prospects of a rate hike in May.

Despite the positive data, the uncertainty related to inflation outlook still remained substantial. The BoE is expected to remain on the side lines going forward especially considering that the UK will be withdrawing from the EU in March 2019 which will have the newly agreed transitional deal in place until 2020. Considering the uncertainty surrounding the Brexit, the Bank of England is expected to tread cautiously.

The BoE meeting is due on May 10th where interest rates are most likely to be raised.

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