Bank of England maintains policy rate

Governor Mark Carney Presents Bank of England's Financial Stability Report

Governor Mark Carney Presents Bank of England's Financial Stability Report

The outlook for the interest rate path in the United Kingdom after May Inflation Report from the Bank of England sees even lower than 90 percent chance for the bank to move in November. The MPC did underline that there were exceptional circumstances presented by Brexit, which is set to occur next March within the forecast horizon that the MPC considers.

After an initial scant reaction, the pound finally succumbed to selling, retreating to an intra-day low of 1.3460, before recovering to close at 1.35202, off by just 0.2% on the day. "Do you act now or do you wait to see evidence that momentum is reasserting (itself)", Carney told reporters when asked about signals from the BoE earlier this year that a rate hike was approaching.

Despite the modest and likely short lived nature of the slowdown, there are some signs that a rate hike might not come even at the next MPC meeting in June. It is, effectively, the fundamental interest rate on which most commercial interest rates on standard bank accounts and loans are ultimately based (though of course other things like risk will play a part when calculating interest on loans).

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".

Despite weak growth, the BoE sees the need for rate hikes because it thinks the economy could overheat due to long-term weak productivity and lower immigration driven by Brexit.

"Our UK economists noted that the meeting brought out mixed messages from the BoE".

James Smith at ING said the approach of crunch negotiations about Britain's post-Brexit trade deal with the European Union could make it hard for the BoE to raise rates later this year. 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.

While headline inflation was shown to have risen in line with expectations last month, core inflation remained subdued.

On growth, the BoE said "very little spare capacity remains in the economy", which grew only 0.1% in the first quarter, down from 0.4% in the fourth quarter of 2017, hampered by poor weather.

As well, while the MPC continued to tow the line of three interest rate hikes over the forecast period, consumer prices were now projected to be almost back down to target in two years' time.

For 2019 and 2020, it predicted growth of 1.7 percent, down from 1.8 percent in its February forecasts.

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