May 24, 2018

Interest rates on hold as Bank cuts growth outlook

12 May 2018, 08:16 | Kenneth Drake

UK momentum will bounce back, BoE's Carney says

Best bonds to invest in 2018

Although rates remain at a very affordable level, even a slight increase could have further dampened the hunger of United Kingdom home buyers, and in a misfiring market that is already struggling to whet their appetite, this may have further stunted price growth.

'Survey data suggests that some of this slowdown can be linked to weaker economic growth in continental Europe, but companies are also reporting that domestic demand among households and businesses has continued to be dampened by uncertainty about the economic outlook and higher prices'.

He said Thursday that rates would rise, albeit modestly, if the economy evolves in line with the bank's new projections. But growth was weakest in Britain, where - less than a year before it is due to leave the European Union - Brexit-related pressures have squeezed consumer spending power and hurt firms' willingness to sign off on major investments.

Sterling was down 0.4 percent at $1.3492 at 1515 GMT, up from around $1.3470 at a fresh four-month low before Carney's comments.

Indeed, during the MPC's press conference, Ben Broadbent, the Bank of England's Deputy Governor for Monetary Policy, appeared to be adamant that the underlying message to markets had not changed.

With investors hating uncertainty, a failure in this regard could give the GBP/EUR exchange rate a chance to recover, but it will be heavily dependent on what occurs in the imminent BoE rate decision.

The bank expects inflation to ease back to 2.1 percent by this time next year and get to target in two years, provided the main interest rate rises to 1.1 percent in two years and to 1.2 percent in three years.

The Bank of England (BoE) today chose to keep interest rates at 0.5% in measured response to relatively weak economic data for 1Q2018.

But late last month, data started to raise doubts. Even so, ultimately it still believes that "an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target at a conventional horizon".

The rate was further lowered by 25 basis points in the wake of the Brexit vote in the summer of 2016 and was raised back to 0.5 percent at the end of past year.

Stuart Law, chief executive of business P2P lender Assetz Capital, said he wasn't surprised by the decision.

"Today's figures support previous estimates showing the economy was very sluggish in the first quarter of 2018, with little impact overall from the bad weather".

In all, money markets have shifted since February between pricing as many as two rate hikes this year to none at all.

Tepid growth was one of the reasons why the bank opted against hiking rates at this month's meeting, as Carney had indicated just three months ago was likely.

"We expect the disappointing first quarter to be portrayed as a temporary lull by the MPC. and therefore expect the lack of a hike to be presented as an expected postponement rather than a cancellation", UBS interest rate strategist John Wraith said.

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