Bank of England likely to delay rate hike as economy slows

Share

He commented: "The manufacturing sector is still growing, and interest rate rises are needed to get back to normal monetary conditions - inflation of 2.5% does not change this". In February, Carney said rates might need to rise somewhat faster than markets had expected. That was another disappointing economic occurrence right before the BOE meeting. Overnight the Reserve Bank of New Zealand also kept its policy unchanged as had been widely expected.

This is largely down to a recent set of figures that showed that the United Kingdom economy grew by just 0.1% during the first quarter of 2018.

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.

With the United Kingdom inflation decelerating toward the target more quickly than expected in February and the GDP growth slowing down sharply at the beginning of this year, it was no surprise from the Bank of England to keep the Bank rate at the unchanged level of 0.50 percent in May.

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.

The Bank of England viewed that that the economy might move into a state of excess demand in early 2020.

Carney said in February that rates might go up sooner than the BoE had previously suggested, and was asked by a reporter on Thursday about the description of him as an "unreliable boyfriend" - first used by a British lawmaker because of his previous signals about when rates might rise, which misfired. "As Brexit looms on the horizon the United Kingdom economy is growing slower than global peers, with no acceleration in sight". Higher interest rates exert downward pressure on inflation, and lower interest rates push it up.

Inflation has been falling a little faster than the Bank expected it to, and it is now expected to drop down to the target 2% within the next couple of years, regardless of any change in interest rates.

The MPC forecast GDP growth to increase after the weak Q1, which it attributes to temporary factors, especially the poor and prolonged winter weather. The Bank of England has marched investors up to the top of the hill only to march them back down again.

Inflation was seen dropping to 2.1 percent in a year's time, and returning to target a year later, but only if interest rates rose by 25 basis points about three times over three years, as markets expect.

GBPUSD is now trading around 1.35180 and went as low as 1.3496 in U.S. session on Thursday, slumped by nearly 0.40% on dovish hold by BOE and forecast of subdued inflation.

Share