Bank of England holds rates, hints that more hikes could be on their way

  • Bank of England leaves monetary policy unchanged, with its base interest rate remaining at 0.5%.
  • Britain’s central bank had been widely expected to leave policy unchanged after raising interest rates at its last meeting in November.
  • “Any future increases in Bank Rate are expected to be at a gradual pace and to a limited extent,” BoE says.

LONDON – The Bank of England left monetary policy unchanged in December, as had been widely expected.

After raising interest rates for the first time in more than a decade in November, the Old Lady of Threadneedle Street was always set for a quiet month, and that proved so, with the bank leaving interest rates unchanged at 0.5%, and leaving its £435 billion cap in place for its QE programme.

The bank’s Monetary Policy Committee voted unanimously to leave rates on hold.

At its November meeting, the bank hinted that the path of interest rates could steepen somewhat in the coming year or so, signalling the potential for another rate hike in early 2018, and possibly even another towards the end of the year, should the economy remain reasonably robust.

That view was maintained in December, with the MPC saying that it “remains of the view that, were the economy to follow the path expected in the November Inflation Report, further modest increases in Bank Rate would be warranted over the next few years, in order to return inflation sustainably to the target.”

“Any future increases in Bank Rate are expected to be at a gradual pace and to a limited extent.”

The bank made clear that Brexit remains the most important influence on the British economy right now, saying that: “Developments regarding the United Kingdom’s withdrawal from the European Union – and in particular the reaction of households, businesses and asset prices to them – remain the most significant influence on, and source of uncertainty about, the economic outlook.”

With inflation still rising thanks to the depreciation of the pound since the vote to leave the EU last summer, the bank faces a key trade off, balancing that inflation with the slowdown in the economy, dwindling consumer spending and declining inward investment.

Inflation hit 3.1% in November, more than one percentage point above the bank’s Treasury mandated 2% target, meaning that Governor Mark Carney must now write a letter to Chancellor Philip Hammond explaining why that is the case.

“In line with the procedure set out in the MPC’s remit, the Governor will be writing an open letter to the Chancellor of the Exchequer, accounting for the overshoot relative to the target and explaining the MPC’s policy strategy to return inflation sustainably to the target,” the bank said.

The pound was little changed against the dollar after the decision, reflecting the lack of surprise in the markets at the decision, as the chart below illustrates:

Screen Shot 2017 12 14 at 12.12.57Markets Insider

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