The BoE holds rates as economic data weakens in its meeting last week, matching market expectations. The BoE was initially supposed to hike rates by 25 basis points at this month’s meeting. But following a soft patch of economic data, the market expectations fell dramatically.
The central bank voted with a 5 – 2 result on interest rates. Two dissenting votes were in favor of a rate hike at last week’s meeting. The MPC members who voted in favor of the rate hike were Ian McCafferty and Michael Saunders. The two members had also voted for a rate hike at the previous month’s monetary policy meeting. However, both members agreed that the weak patch of economic data was due to temporary factors. However, they said that delaying a rate hike could risk a faster pace of tightening in the longer term.
The central bank said that weak growth during the first quarter of the year was likely to be temporary as it said that growth was influenced by the weather in the first quarter of the year. However, at the same time, the central bank said that it would wait for the economy to pick up in the coming months before the next rate hike.
The central bank’s decision was in sharp contrast to the expectations set forth by the monetary policy committee just a few weeks ago. Various members of the MPC including the BoE Governor Mark Carney were hawkish on the economy.
The BoE Governor, Carney also cut the 2018 growth forecasts while trimming inflation forecasts as well. The central bank stuck to the baseline narrative that interest rates are likely to rise in the coming months.
“What’s the sensible thing to do? Do you act now or do you wait to see evidence that that momentum is re-asserting,” Carney said in the post monetary policy press conference. He added that the majority view of the monetary policy committee was to wait and see for some evidence of the economy reasserting itself.
Despite the dovish outcome at last week’s meeting, the markets are still pricing in another rate hike this year, thus underlining the fact that the BoE is only delaying the rate hike rather than cancelling it altogether.
The decision comes amid a poor set of economic data. UK’s economy was seen slowing sharply in the first quarter of the year. This was widely attributed to the Brexit event which led consumer prices to rise sharply while leaving wage growth lagging behind inflation.
The Bank of England hiked interest rates in November last year and since then, consumer price inflation was seen peaking to around 3% before easing back. Despite the weak patch of data in the first quarter, central bank policymakers maintained their view for rate hikes as they expect that the UK’s economy could overheat on long term productivity which remains weak and lower immigration.
According to the BoE’s forecasts, the UK economy is expected to rise 1.4% on an annual basis this year. This was a revised down print compared to the 1.8% forecast that was given in February. Consumer prices were also expected to ease to 2.1% by next year and it is expected to return to the 2% inflation target if the central bank hiked interest rates by three times over the next three years.
The Bank of England also touched upon Brexit noting that while the initial uncertainty had paved way to some clarity in terms of the transition deal that was negotiated, Carney said that uncertainty still remains which could impact the UK’s economy.
The British pound was seen posting losses on the day following the central bank’s decision.