Tthe Bank of England in London. Picture: BLOOMBERG
Tthe Bank of England in London. Picture: BLOOMBERG

London — The Bank of England (BOE) kept interest rates on hold after a first-quarter economic slump, and forecast that inflation will slow to its target faster than previously anticipated.

The monetary policy committee (MPC) voted seven to two to hold at 0.5%, as predicted by all but three of 54 economists in a Bloomberg survey. Ian McCafferty and Michael Saunders reiterated their support for an immediate increase.

The decision ends a roller-coaster ride for investors who had expected a hike until a few weeks ago, when data revealed a near standstill in economic growth and slower-than-expected inflation. While the BOE keeps alive the prospect of a rate increase later this year, its statement suggests a gentle tightening pace.

Explaining their decision to stand pat this month, the majority of the MPC noted the recent weak numbers. They said that "the costs to waiting for additional information were likely to be modest, given the need for only limited tightening over the forecast period".

Mark Carney. Picture: REUTERS
Mark Carney. Picture: REUTERS

Governor Mark Carney will elaborate on the outlook at a press conference in London later.

Future increases

New forecasts from the central bank showed inflation will slow more sharply, falling to the 2% target in two years — but it said this is partly because the pass-through of the pound’s depreciation since the Brexit vote is happening faster. It still sees a small amount of excess demand in the economy by early 2020.

The inflation report also showed that about a one-quarter-point hike a year will be needed to return inflation to the goal after the first increase in a decade last November.

"An ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target at a conventional horizon," the BOE said. It repeated its well-worn refrain that future increases will come "at a gradual pace and to a limited extent".

The BOE isn’t alone in taking a cautious approach to raising rates from levels that are still at emergency lows a decade after the financial crisis. The US Federal Reserve signaled this month that a pick-up in inflation won’t push it to increase its tightening pace, while the European Central Bank (ECB) hasn’t even started formal discussions on how to start its stimulus exit.

Growth outlook

In the updated forecasts, the UK central bank sees growth at 1.4% this year, down from 1.8% in February. But it puts all this down to the first-quarter slump, which it suspects will be revised up to 0.3% from the initial estimate of 0.1%. The bank’s forecasts for 2019 and 2020 were unchanged at 1.7%.

The MPC’s two dissenters in favour of tighter policy put more weight on surveys suggesting the slowdown was temporary and signs that domestic inflationary pressures are building. Their argument hinges on the labour market, where unemployment is the lowest since the 1970s and wage growth is picking up, bolstering their assessment that slack is largely used up.

The BOE reiterated that the economy may be running a bit hot for its potential as negotiations to leave the EU constrain the supply side. With the split scheduled for March 2019, the bank said managing the implications of Brexit remains the main challenge for rate setters.

Bloomberg

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