Pound dips after Bank of England holds rates

May 11, 2018, 04:20

The Bank of England held interest rates steady on Thursday and said weak growth during a snowy start to 2018 was likely to be only temporary, but it wanted to see a pick-up in the economy in the next few months before raising borrowing costs.

Tom Stevenson, investment director for personal investing at Fidelity International, explains: "Until a few weeks ago, a further quarter point rate hike to 0.75% looked nearly guaranteed".

Bank of England governor Mark Carney.

James Smith, an economist at ING, said: "As the Bank of England points to a possible rebound in economic growth and further wage rises, we think markets may have been too quick to write off a near-term rate hike". "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".

Despite their decision to hold fire on Thursday, policymakers insisted that further rate increases are likely.

However, that judgement relies on the economic data evolving broadly in line with the Committee's projections'.

The delay in rate increases has been due to two factors.

Although employment remains high, the economy expanded at its slowest pace in five years in the first three months of 2018, according to the latest government data. The inflation rates of the most import-intensive components of the CPI appear to have peaked.

US Consumer Price Index rose 0.2% in April, vs 0.3% increase expected. That matters as the rate-setting body's primary mission is get inflation close to 2 percent.

Bank of England Governor Mark Carney had indicated in November that economic policy had been entering an era of slow, gradual rate increases.

It added it continued to believe an "ongoing tightening of monetary policy over the forecast period would be appropriate".

Recent data from elsewhere across the globe has seen inflationary pressures remain subdued with last week's European Union inflation still well below target, Chinese CPI slipping to 1.8% this morning, while United States inflation appears to be starting to show signs of finally moving above the Fed's 2% target level.

While markets had already effectively ruled out the prospect of an interest rate hike the Pound still came under fire after the Monetary Policy Committee (MPC) voted to leave policy unchanged. Traders expect the currency to rally, depending on the outcome of Brexit negotiations; for the moment, most polls still project an orderly Brexit. Growth was weakest in Britain, where Brexit-related pressures have squeezed consumer spending power and hurt firms' willingness to sign off on major investments.

'This is yet another ample demonstration of the futility of trying to guess the date of the next interest rate rise, and how risky it is to base your savings strategy on unreliable predictions, ' noted Cole.

Like bad weather, Brexit is a variable that risks derailing the central bank's plans.

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