Thursday, 22 June, 2017

Bank of England keeps rates at record low as economy slows

Conrad Doyle | 17 June, 2017, 11:24

The Bank of England (pictured above) held interest rates at their all-time low of 0.25% but surprised markets with news of a 5-3 split on its monetery policy committee (MPC).

That could raise the pressure on the central bank's rate-setting monetary policy committee when it considers a rate hike later this week.

Amit Kara, head of United Kingdom macroeconomic forecasting at National Institute for Economic and Social Research (NIESR) said: "We expect inflation to rise further over the course of this year and to reach a peak in the final quarter of 2017".

"The Bank of England caught traders off-guard on Thursday, turning what was expected to be a rather mundane affair into something far more interesting", said Oanda analyst Craig Erlam. Higher inflation is making weak wage growth worse.

Economists polled by Reuters expect April's wage growth reading to come in at 2.4% - still lagging inflation which came in at 2.7% in April and hit 2.9%, its highest in almost four years, in May. The BoE decision came hours after the Federal Reserve raised interest rates for a second time this year and Chair Janet Yellen indicated she's pressing on with normalizing monetary policy.

"The economic and political uncertainty, we believe, is too great to get a consensus behind higher rates and with Kristin Forbes leaving the BoE this month, the hurdle to getting that consensus will soon be harder to achieve".

Attention is now turning to the future make-up of the MPC.

One seat on the committee was empty - the result of resignation by the Bank's deputy governor, Charlotte Hogg, when it emerged she had breached the Bank's code of conduct.

Hammond and Carney had been due to address an annual dinner for financiers in the City of London later on Thursday.

News of the split - which follows a rise in USA interest rates last night - knocked government bonds with the price of 10-year gilts dropping and their yields jumping nine basis points (0.09%) to 1.02%.

The Bank of England (BoE), led by governor Mark Carney and tasked with keeping inflation close to a 2.0-percent target, will announce its latest interest rate decision on Thursday.

The fall in the pound after last week's election could push prices yet higher, the central bank said. Now she must rely on the support of Northern Ireland's Democratic Unionist Party. The rise in political uncertainty since the General Election - and questions over the type of Brexit PM May will look to pursue - has cast a pretty big shadow over the Bank's "smooth" European Union withdrawal assumption made at last month's MPC meeting.

For now, it is willing to wait that out, arguing that to do otherwise would risk weakening already low income growth and come at the cost of higher unemployment.

Retail figures released today suggest consumers are starting to feel the pinch from inflation as retail volumes fell sharper than expected in May to -1.2 per cent.

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