The Bank of England (BoE) held its monetary policy meeting last week on Thursday. As widely expected, the central bank raised the key lending rate by 25 basis points to 0.75%. This was the second interest rate hike since November 2017.
However, the central bank signaled that it was not in a hurry to hike rates as the outlook over the Brexit deal looks uncertain, with no clear plan in place for leaving the EU.
The decision to hike interest rates by 25 basis points came as a unanimous decision with all nine members of the monetary policy committee voting for a rate hike. The median expectations showed a 7 – 2 vote on the rate hike with two dissenters.
Despite the rate hike, which was already priced in, the Sterling fell on the day against both the Euro and the Dollar. This came as the BoE Governor, Mark Carney said that rate hikes would be gradual. “Policy needs to walk, not run – to stand still,” Carney said during the press conference. He added that the BoE’s neutral rate for the economy will rise at a gradual pace against the backdrop of strong global growth.
The UK’s economy has been sluggish with the first quarter growth coming in at 0.2%. This was one of the slowest paces of increase in quarterly growth compared to the G7 nations. Growth in the UK has significantly slowed down ever since its decision to leave the EU.
Brexit uncertainty also remained a major factor for the BoE to stress a cautious tone. With just eight months left until Brexit, the UK and the EU continue to diverge on the future of their trading relationship.
BoE Governor, Mark Carney said that there was a wide range of outcomes for Brexit and he said that this requires interest rates to be high, at least for the moment. He added that the BoE was expecting to see a smooth Brexit transition.
Despite growth slowing, the Bank of England insisted that the UK’s economy was operating at full capacity and is expecting inflationary pressures to rise.
However, some economists believe that the rate hike came too soon. The central bank’s rate hike is widely expected to be a one and done hike. The BoE forecasts that inflation will remain a fraction above the central bank’s target of 2%.
The market, based on the overnight swaps index, is pricing in a rate hike only in 2019 or by early 2020. Still, a lot depends on the outcome of Brexit negotiations.
According to the BoE, inflation is expected to be around 2.1% in two years’ time. It also forecast that the economy would grow at an annualized pace of 1.4% this year. The forecasts were unchanged from the previous report. GDP forecasts were revised higher to show an average of 1.8% growth, up from the previous 1.7%.
On wage growth, the BoE said that annual wages are expected to rise 2.5% on the year in 2018. The pace of increase was slightly slower compared to previous forecasts. The BoE however, remained optimistic that wage growth would rise to 3.2% by 2019.
The BoE’s interest rate decision comes ahead of this week’s preliminary GDP report for the second quarter. Economists forecast that the UK’s economy advanced 0.4% on the quarter, pushing the annual GDP growth rate to 1.3%.
This follows a sluggish 0.2% GDP growth on the quarter ending March 2018.
