Bank of England votes 8-1 to stand pat on rates

Economic News

Bank of England votes 8-1 to stand pat on rates

Thu, 16 March 2017
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(ShareCast News) - The Bank of England has voted 8-1 to stand pat on monetary policy, as widely expected by economists.
The Monetary Policy Committee held interest rates at an all-time low of 0.25%, keeping government bond purchases at £435bn and corporate bond purchases at £10bn. Kristen Forbes was the only member to back a rate hike - to 0.5% - marking the first time since July 2016 that the vote to maintain rates was not unanimous.

Forbes, who is due to leave the MPC at the end of June, reckoned that inflation was rising quickly and likely to remain above the 2% target for at least three years. The minutes also stated that she believed "weakness in activity expected since the referendum had not materialised" and that unemployment has shown no signs of increasing.

The FTSE 100 held on to solid gains immediately after the announcement but soon began to pare these gains, while the pound pushed higher, trading at a two-year high of $1.2350 on the back of the split and as the minutes suggested some members might be closer to voting for a rate increase as they begin to appreciate the potential risks to the economy of trying to cure inflation.

"Pay growth had remained subdued, consistent with the Committee's view that some slack remained in the labour market, and there had been some signs that the squeeze in households' real income growth was feeding through into spending, as expected. In this context, the conditioning assumption that had underpinned the February projections - that there would be some modest withdrawal of monetary stimulus over the course of the forecast period - remained appropriate.

"The potential for uncertainty over future trading arrangements to affect materially economic decision making remained, posing a downside risk to the activity outlook, to which the Committee could respond if necessary. On the other hand, with inflation rising sharply, and only mixed evidence on slowing activity domestically, some members noted that it would take relatively little further upside news on the prospects for activity or inflation for them to consider that a more immediate reduction in policy support might be warranted," the minutes stated.

The BoE said it expects UK inflation - which was at 1.8% in January - to rise above 2% in the next few months before peaking at around 2.75% early next year and drifting gradually back down towards the Bank's target thereafter.

Tom Stevenson, investment director for personal investing at Fidelity International, said: "Even with inflation expected to breach the central bank's 2% target this year and unemployment at its lowest since the 1970s, the Bank is keen to keep rates low ahead of Article 50 and two years of uncertain Brexit negotiations. The danger this presents is the Bank getting behind the curve as price pressures increase. When it comes to inflation, you can't put the toothpaste back in the tube.

"In this environment of lower for longer interest rates and rising inflation, it is even more important to find alternatives to the meagre returns currently offered by cash. With global economic growth picking up, shares offer investors a much more attractive potential combination of growth and income."

Martin Beck, senior economic advisor to the EY ITEM Club, said that despite surprise at the break in unanimity, he would be "surprised if the MPC move out of its holding pattern during 2017".

"The economy will slow through the year as higher inflation bites and, with wage growth remaining subdued, there is little evidence that inflation is likely to remain high once the effects of a weaker pound have washed through."

Meanwhile, Neil Wilson, senior market analyst at ETX Capital, said "the minutes paint a picture of a committee moving a lot closer to hiking rates than markets had realised".