Thursday, 24 May, 2018

Sterling falls after Bank of England holds rates, cuts growth forecasts

Heather Davidson | 11 May, 2018, 01:05

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 Bank of England's monetary policy committee Thursday made a decision to keep interest rates on hold. "Stock markets don't tend to like rising interest rates much, so an environment where rates rise only gradually should be supportive for the United Kingdom stock market".

Announcing this decision, the Bank also cut its growth forecast for 2018 from 1.8 to 1.4 per cent.

The outlook beyond then remained at February's levels of 0.9% in Q2 2019 and 1.1% in 2020.

"We therefore continue to forecast the Bank of England to make their move to 0.75% in August, but due to the reinstatement of data dependency into its policy reaction function, we don't expect the ride to this hike to be smooth".

Mr Draghi will be speaking on Friday afternoon at a European University Institute (EUI) event in Florence and may touch on monetary policy.

However, despite Carney's changing opinions, he's suggested numerous times that the economic data would need to back calls for a rate hike, which now, it doesn't. Previously the cost of borrowing had been decided between the chancellor and the governor of the Bank.

Mr Carney said the bank's nine-member rate-setting body thinks the "underlying pace of growth remains more resilient than the headline data suggest", according to AP.

The four external members are appointed to bring thinking and expertise from outside the Bank to the meetings.

As recently as the middle of last month, implied probability pointed to an all but certain 25 basis point rise.

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The UK economy experienced its worst quarter in five years.

Whilst the GDP data was hugely disappointing growing just 0.1% quarter on quarter, a good deal of the data and modelled data are linked to unseasonable cold weather supporting the idea that the weak prints were likely to be one off's rather than a more serious structural change in the economy.

But wages - which the Bank is also closely-watching - are beginning to outstrip inflation, with average weekly earnings up 2.8% in the year to February in a sign that other inflationary pressures may be building. The unemployment rate has fallen to 4.2 percent-the lowest rate recorded since the mid-1970s.

"The Monetary Policy Committee judges that an ongoing, modest tightening of monetary policy over the forecast period will be appropriate to return inflation sustainably to its target".

But the Bank's quarterly forecasts revealed there was some doubt around the underlying economic picture in the United Kingdom, noting "greater-than-usual uncertainty" over consumer spending.

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