Bank of England holds interest rate at 0.25%

06 August, 2017, 01:38 | Author: Franklin Nunez
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Prospects for an interest rate rise had appeared to be gaining ground at the Bank, after Haldane's comments were followed by a shift to a more hawkish tone from governor Mark Carney. However, on Thursday the pair plunged and hit a low of 1.1054.

With political uncertainty, soft economic fundamentals and ongoing Brexit concerns weighing heavily on the British economy, "investors may start to question whether the BoE moves forward with raising rates in 2018", said FXTM research analyst Lukman Otunuga. "Consequently the task of determining just what effect Brexit had on the United Kingdom economy will mostly fall on the shoulders of tomorrow's historians, rather than today's economists".

In the previous MPC meeting three members had voted to raise interest rates, versus five who wanted no change. Inflation was broadly unchanged, but wage inflation was revised sharply lower, the BOE now expects real wages to fall by 0.5% this year, suggesting that the BOE (along with other global central banks) still haven't figured out how to fix the problem of low unemployment but stagnant wages. Growth in 2018 is also expected to slow from 1.7% to 1.6%.

The Euro has been sturdy enough to prevent the Pound from recovering much this week despite indications that the Eurozone's economy could slow slightly in Q3 2017.

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Sterling dropped to a nine-month low against the Euro after the downward revision to the growth forecasts. Her replacement, Silvana Tenreyro has voted to keep rates on hold in her first outing.

"Since the referendum was called, United Kingdom households, businesses and financial markets have reacted at different speeds and to varying degrees to the prospects for the UK's departure from the EU".

The cost of living had reached a a near four-year high of 2.9% in May, before unexpectedly falling to 2.6% in June.

The signal from London comes as accelerating growth in the 19-nation eurozone cements expectations that the European Central Bank will begin to phase out its stimulus measures next year as the region emerges from the shadow of the past decade's financial crisis.

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Former British Chambers of Commerce director general and co-chairman of pro-Brexit lobby group Leave Means Leave, John Longworth, said he agreed that business confidence is "lower than it ought to be".

Inflation stood at 2.6% in June and the Bank expects the rate to remain above the 2% target throughout the three-year forecast. In May, the BoE forecasted the economy will expand 1.9% in 2017, and inflation will increase to 2.7%.

If the economy performs as it expects, the benchmark interest rate will need to rise by a "somewhat greater extent" than markets now anticipate, it said.

While growth is running a bit cooler than expected, inflation is a bit hotter in the near term and safely above the Bank's 2% target.

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