Bank of England looks to August for a rate hike

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The Bank of England held its monetary policy meeting last week on Thursday. As widely expected, the central bank left the key interest rate unchanged at 0.50%. However, the central bank was seen laying the ground work for a rate hike in August.

However, a lot will depend on how the UK’s economy fares in the second quarter of the year. Officials, in the monetary policy statement noted that the weakness in the first quarter economic growth might have been temporary. The UK’s economy was seen expanding at the slowest pace among the G7 nations.

The declines came as business investment fell due to the uncertainty surrounding Brexit. This was further fuelled by the high inflation that came as a result of the Pound sterling weakening following the Brexit decision.

Still, a majority of economists polled expect to see that Bank of England most likely to hike rates at the August monetary policy meeting or later in the year.

Consumer prices in the UK have somewhat stabilized since hitting a peak of 3.1% in November last year. Monetary policy officials responded with a 25 basis point rate hike, which was the first in nearly a decade and the first rate hike after the Brexit decision. As of the most recent reports, consumer prices in the UK inched lower to 2.5%, but it is still elevated compared to the BoE’s 2% inflation target.

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Wage growth, which is another key factor that sheds light on consumer spending and inflation was also seen rising at a subdued pace. This comes despite the fact that the UK’s unemployment rate was at its lowest levels since 1975.

The British pound was seen falling sharply ahead of the BoE meeting but managed to post a rebound. The rebound in the currency came despite the central bank holding interest rates steady. But the decision was not unanimous as the minutes recorded three dissenting votes in favor of a 25 basis point rate hike. Among the dissenting votes was the BoE’s chief economist, Andy Haldane.

Haldane was the new dissenting vote, following other hawks on the MPC including Ian McCafferty and Michael Saunders.

The Bank of England also changed its course on forward guidance on its QE program. It set out a new guidance and noted that the central bank could start selling its 435 billion pounds of British government bonds it purchased after the 2008 global financial crisis.

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The central bank said that once interest rates reaches 1.5%, the central bank would begin to unwind its QE purchases. This was seen to be slightly hawkish as a majority of market watchers expected that this would happen when interest rates hit 2%.

Central bank officials noted that household spending and sentiment had bounced back and noted that the decline in the factory output in April might have been due to excess inventory.

The BoE was initially expected to have hiked rates at the May monetary policy meeting. But the weakness in the first quarter reports saw officials holding back. The markets for now expect to see the BoE hike rates at least once this year, which would bring the interest rates to 0.75%.

This is still a far shot away from the 1.5% threshold mentioned by policy makers before they start to unwind the QE purchases.

A lot hinges on how the UK’s economy will fare in the coming months. A better than expected uptick in the economy could however boost chances of an additional rate hike from the BoE. But this is uncertain given the backdrop of the global trade uncertainty due to the U.S. policies.


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