Bank Of England: Bank Rate Maintained At 0.50%

Danny Woods
March 26, 2018

The Bank of England said on Thursday it had made a decision to keep its main interest rate at 0.50 percent, as it weighed high United Kingdom inflation against Brexit uncertainty.

Yields on 20- and 30-year gilts, fell as low as 1.744 percent and 1.725 percent respectively after the BoE said seven of its rate-setters voted to keep rates on hold for now while the other two backed an immediate increase.

But in the BoE's view, a lack of spare capacity in the economy means it would take years for inflation to return to its 2 percent target if it does not raise rates.

According to the minutes, the duo said "a modest tightening of monetary policy at this meeting could mitigate the risks from a more sustained period of above-target inflation that might ultimately necessitate a more abrupt change in policy and hence a greater adjustment in growth and employment".

The bank's Monetary Policy Committee is set to unanimously back unchanged policy, but it will likely set the path for a rate hike in May.

Carney has said interest rate policy will depend heavily on Brexit talks progressing smoothly and not derailing confidence. But pressure for a May hike is being fuelled by impatience from MPC committee members Michael Saunders and Ian McCafferty who want a rate increase now to swerve possible hastier moves upwards later.

The bank increased its base interest rate from 0.25% to 0.5% in November last year, having previously failed to raise rates in more than a decade as a response to the financial crisis.

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It had expected growth to remain at around 0.4 per cent before the snow hit.

Even though average weekly earnings figures bettered forecast in the three months to January it remains to be seen whether this will actually encourage consumers to start spending more.

He said: "We continue to expect activity and inflation data to surprise the Committee to the downside, ensuring that it waits until August to raise interest rates again".

"The Bank faces a delicate balancing act", said Ben Brettell, senior economist at Hargreaves Lansdown.

"All these factors paint a positive outlook for the Pound and shape expectations for a bullish BoE message which will underpin investors" hopes for a rate hike soon'.

Regarding Brexit, the minutes said that "developments regarding the UK's withdrawal from the European Union - and, in particular, the reaction of households, businesses and asset prices to them - remain the most significant influence on, and source of uncertainty about, the economic outlook". The bank had previously raised its key rate in November 2017, which was the first hike in a decade. "The firming of shorter-term measures of wage growth in recent quarters and a range of survey indicators suggest pay growth will rise further in response to the tightening labour market", the MPC said.

British retail sales published on Thursday also came in better than expected as inflation slowed.

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