BOE Keeps Interest Rates on Hold, Sees Inflation Cooling Faster

The Bank of England 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 voted 7-2 to hold at 0.5 percent, 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.

© Bloomberg Dovish Hold

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.”

Future Increases

New forecasts from the central bank showed inflation will slow more sharply, falling to the 2 percent 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 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 Federal Reserve signaled this month that a pickup in inflation won’t push it to increase its tightening pace, while the European Central Bank hasn’t even started formal discussions on how to start its stimulus exit.

Growth Outlook

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

The MPC’s two dissenters in favor 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 labor 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 central bank reiterated that the economy may be running a bit hot for its potential as negotiations to leave the European Union constrain the supply side. With the split scheduled for March 2019, the BOE said managing the implications of Brexit remains the main challenge for rate setters.

SOURCE: Bloomberg.com

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