As UK economy slows, central bank holds off rate increase

Oscar Cross
May 13, 2018

This week it voted to hold rates at 0.5 per cent because of disappointing...

The BoE also left the Bank Rate unchanged at 0.5 percent, with only two out of nine rate-setting Monetary Policy Committee (MPC) members voted for a rise, with the two minority-view members being external appointees Ian McCafferty and Michael Saunders, with the BoE's six staff all voting for no rise.

The preliminary estimate of the U.K.'s GDP growth in the first quarter was 0.1 percent, 0.3 percentage points lower than expected in February, the bank said.

The slowdown in the first three months of the year was one of two reasons why the Bank stayed pat.

The Bank of England has put back plans for an increase in interest rates after the weaker-than-expected performance of the economy in early 2018. The pound, which last month hit its highest level since the country voted to leave the European Union in June 2016, at $1.40, is faltering again. Carney later told BBC television that interest rates were likely to rise by the end of this year.

Inflation, while still considerably above target, has fallen faster than the Bank expected and wage growth - which has long underpinned the BoE's view that rates will need to rise gradually over the next few years - dropped to less than 1 percent annualized in the three months to February.

Carney defended himself against that charge, arguing that when the situation changes, the bank's policy response has to change. "With rates still rooted at emergency levels, this is one of the challenges faced by the Bank and how it chooses to deal with this will be key to the success of the United Kingdom economy in coming years".

But Threadneedle's Street belief that the economy actually grew more strongly than the 0.1% estimated by the Office for National Statistics will keep alive speculation that a quarter-point increase in borrowing costs is possible when the next inflation report is released in August.

Recent data "had been consistent with a temporary soft patch", most of the BoE's rate-setters said. "Overall, our United Kingdom team noted that given the lower urgency for a rate hike due to the need for "limited tightening" over the forecast horizon, they see an increase in rates contingent on growth bouncing back and negotiations on the Brexit front staying positive, while their call for an August rate hike stands".

"The committee's best collective judgment therefore remains that, were the economy to develop broadly in line with the May inflation report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target". "If growth rebounds as we expect in 2Q the next increase in interest rates is likely to come in August".

Bank economists think the first-quarter growth figure was distorted by unusually cold weather and will eventually be revised up to 0.3%. But "there was value in seeing how the data unfolded over the coming months", they added.

Financial markets have made a similar about-face.

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