April 23, 2018

Bank of England keeps rates steady, but two policymakers unexpectedly back hike

26 March 2018, 01:13 | Clyde Nash

Pound to Euro Exchange Rate Forecast: GBP/EUR Could Extend One-Month-High on Bank of England News

Bank of England keeps policy rate at 0.5 pct

For the time being, Britain's central bank is keeping interest rates at 0.5%, and confirmation of the bank's decision encouraged sterling to appreciate further, continuing a recent rally on the back of progress in the country's Brexit negotiations with the EU.

The pound also spiked above $1.42 before falling back as investors focused on the likelihood that rates will rise only very slowly.

"Such a path would bring us closer to the neutral policy rate, which I continue to think is likely to be well below the neutral rate that prevailed in the pre-crisis decades", Vlieghe said.

"With another hike in interest rates in May now largely priced into markets (and supported by this week's Monetary Policy Committee (MPC) Minutes), the bigger question is just how "limited and gradual" the rise in interest rates will be thereafter", says Paul Hollingsworth, a senior United Kingdom economist at Capital Economics.

While modest by historical standards, that growth rate was expected to exceed the diminished rate of supply growth of the economy, which was projected to be around 1½% per year.

According to Vlieghe, lower productivity growth means the "new normal" wage growth might only be around three per cent, rather than four per cent.

Data on Wednesday showed pay growth at its highest since 2015, which the BoE said bolstered policymakers' certainty that domestic cost pressures were building, hampering inflation's return to target.

No economist polled by Reuters expected the Bank of England to follow up on its rate hike in November - its first since 2007 - with a rate hike at its March meeting.

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"The best collective judgement of the MPC remained that, given the prospect of excess demand over the forecast period, an ongoing tightening of monetary policy over the forecast period would be appropriate", said the minutes of this month's meeting.

All members agree that any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent. It fell from 3% to 2.7% between January and February.

Seven of the BOE's nine officials voted to hold off for now, arguing that incoming data on growth and inflation don't yet justify another rise. Inflation is expected to ease further in the short term although to remain above the 2% target.

Bank of England will announce its latest monetary policy decisions at midday.

Considering that the committee voted unanimously at the last meeting, the two votes in favor of a hike might be interpreted as a change in policy direction in May.

In the wake of the Bank of England's (BoE) March policy announcement the Pound to Euro (GBP/EUR) and Pound to US Dollar (GBP/USD) exchange rates continued to push higher.

British inflation jumped a year ago and remains at an elevated level after Britain voted to leave the European Union in 2016.

Early estimates among its staff suggest growth may slow to 0.3% in the first quarter from 0.4% at the end of 2017.

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