The Bank Of England Turns Dovish In May And Walks Away

May 12, 2018, 07:41
The Bank Of England Turns Dovish In May And Walks Away

"Another poor decision. keeping interest rates at 0.5 pct despite nine years of economic recovery, a buoyant global economy, above target inflation and the lowest unemployment rate for 43 years", said Andrew Sentance, a former Bank of England policymaker, on Twitter.

The BOE expects an economic expansion of 1.4 percent this year, down from 1.8 percent in February's forecasts.

An interest rate rise would have helped to strengthen the Pound, but in the event it slipped back from $1.3617 before the decision to trade at $1.3500 at the time of writing (recovering from a low of $1.3471). On the other hand, the BoE revised down its inflation forecasts both in the short and medium term, while reducing growth this year by 40bps.

"Following all the above, the Bloomberg implied odds of a rate hike in the August meeting fell 12ppt to 42%".

The BOE isn't the only central bank to wobble on the exit ramp from the easy money of the past decade, even as the U.S. Federal Reserve sticks to its plan to gradually raise rates.

"It's likely over the course of the next year rates will go up. that's the most likely thing to happen", Mr Carney said in an interview with the BBC, the broadcaster said.

In minutes of the MPC meeting, the Bank said: "Weakness in the data for the first quarter had been consistent with a temporary soft patch, with few implications for the current degree of slack or for the outlook for the United Kingdom economy". But "there was value in seeing how the data unfolded over the coming months", they added. BoE governor Mark Carney said: "The overall economic climate in the United Kingdom looks little changed thus far".

However, JP Morgan economist Allan Monks said the BoE had sent a "muddled message" about its intentions. Still, the accompanying comments and the fact that two members of the Monetary Policy Committee - Ian McCafferty and Michael Saunders - continued to advocate for an immediate hike, implies that the prospect of a hike in 2018 is more finely balanced than current market pricing would suggest, noted Lloyds Bank in a research report.

The Bank of England adjusts the base rate in accordance with the general economic climate in order to either encourage saving or spending with the general aim of maintaining a prosperous and stable economy.

New forecasts from the central bank showed inflation will slow more sharply, falling to the 2 percent target in two years, partly because the pass-through of the pound's depreciation since the Brexit vote is happening faster.

In its May Inflation Report, the BoE revised its projected GDP growth expectations for the second quarter of 2018 down from the February estimate of 1.8% to 1.4%, while predicting inflation will fall to 2.4%, rather than 2.7% as previously forecast.