May 27, 2018

The Bank Of England Turns Dovish In May And Walks Away

11 May 2018, 04:19 | Sheila Mcguire

Seven monetary policy committee members voted to hold rates at 0.5 per cent at the May meeting, while two wanted an immediate quarter-point rise.

This underwhelming start to 2018 also saw the BoE make some revisions to its growth forecasts for the year, with the bank now expecting the United Kingdom economy to expand 1.4% in 2018, rather than the 1.8% growth it had forecast back in February.

However, recent economic activity - which paints a weaker picture - has meant they have instead kept the rates at 0.5%, with a member vote of 7 to two.

The rise in the oil price, now up over 50% since September last year, hasn't as yet prompted a re-evaluation in this year's economic forecasts but as can be seen from recent weak consumer data, in Europe, the United Kingdom, as well as the U.S., it could well be starting to have an effect in some of the more recent retail sales numbers.

Failure by the Bank of England to increase interest rates will be storing up problems for how we cope with a future recession, an economist has said.

Instead, figures showed the economy barely grew in the first three months of the year and inflation fell by more than anticipated.

In recent months, the prospect of an interest rate rise by the Monetary Policy Committee (MPC) has been considered an nearly sure thing.

As the Bank now sees inflation clocking in at just 1.4% in 2018, as opposed to the 1.8% growth forecast in February, this encouraged investors to pile out of the Pound. We expect an acknowledgement from Carney that economic conditions have worsened since the last meeting in March, while there is a good chance that we'll see a downward revision in the 2018 growth forecast, although this may be largely priced in.

"Unfortunately, their patience will now be tested once again, as they will have to keep waiting for base rate to increase", she said. Only a week later, the first quarter GDP (gross domestic product) print came in at a tepid 0.1 percent quarter on quarter, below consensus of 0.4 percent and the BOE's own forecast of 0.3 percent. Inflation has fallen after reaching its highest in more than five years in late 2017, but at 2.5 per cent it is still well above the BoE's 2 per cent target. The currency was trading on a low against the dollar of $1.3499 before easing to relative levels.

The pound has been displaying a very all or nothing attitude towards BoE monetary policy suggesting that investors are looking for much more clarity from the central bank.

Particular focus will likely be placed on the UK's latest earning figures, with a possible uptick in wage growth likely to be seen as an indication that the United Kingdom economy may begin to pick up steam again in the second quarter. It indicates where the BOE sees inflation in the following years.

Britain's economy grew more slowly than most of its peers previous year after a Brexit-driven jump in inflation hit consumer spending power and some businesses delayed long-term investment.

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