Bank of England keeps interest rates on hold despite inflation fears

04 August, 2017, 00:37 | Author: Dustin Murphy
  • Bank of England protest

By 2pm BST, the pound was 0.78% lower against both the dollar and the euro, trading at $1.3118 and €1.1062, as the common currency moved towards its highest level against sterling since November previous year. Shares rose and British government bond prices jumped.

The BOE's governor Mark Carney has warned Britain is beginning to adjust to a 'new and uncertain' relationship with the European Union.

Meanwhile, formal Brexit talks between the United Kingdom and the European Union have endured a somewhat bumpy start, leaving many firms anxious about the risk of a damaging divorce in 2019. As a result, I think the BoE will lower their GDP forecast for the rest of the year, and probably inflation, which could dampen rate hike expectations for the months to come.

The UK gilts jumped Thursday after the Bank of England (BoE) downgraded its growth and inflation forecasts of the economy, while maintaining the Bank rate unchanged at 0.25 percent at its monetary policy meeting held today.

Although the central bank kept policy unchanged on 15 June, three MPC members voted to hike interest rates. Thus the balance is likely to shift back to 6-2, from 5-3.

Since then one of the dissenters, Kristin Forbes, has left the central bank. Ian McCafferty and Michael Saunders voted for the rise.

Britain's pound hit $1.32 on Monday for the first time in over 10 months, as investors eyed this week's Bank of England "Super Thursday" for a steer on whether record-low interest rates could soon be lifted for the first time in more than a decade.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said it was no surprise that the BoE chose to hold fire on lifting interest rates given the slowdown in economic growth and consumer spending.


"Brexit even overshadows consumer borrowing, which the Bank has lately sounded anxious about". "The chances of a 2017 rate hike now look dead and buried", he added. However, it has signalled the end of the Term Funding Scheme, created to make cheap money available to banks.

In June's meeting, three members of the MPC voted for a rise.

With low unemployment, wages are expected to rise.

Shire fell 1.9 percent, reversing earlier gains.

Furthermore, Brexit talks between London and Brussels have made little progress, raising concerns that a messy departure from the bloc in 2019 could hammer the economy.

New economic forecasts released by the Bank at the same time cut the outlook for GDP growth this year and next and painted a weaker picture for earnings growth.

But a raft of weaker data - as well as deep uncertainty about the impact of Brexit - called that view into question.

The government sets the Bank an inflation target of 2% but the rate is now above that at 2.6%, with policymakers expecting it to pick up and peak around 3% in the autumn on the consumer prices index (CPI) measure. However, the MPC predicted "significant upward pressure" from import prices in the coming months and for inflation to peak at around 3 percent in October.

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