- Bank of England holds interest rates at 0.25%
- Cuts growth forecast for 2017 from 1.9% to 1.7%
- Six members of the Monetary Policy Committee vote to leave rates unchanged, two voted to hike.
LONDON — The Bank of England on Thursday afternoon left monetary policy unchanged for another month, meeting the expectations of forecasters and the markets in the process
The bank’s Monetary Policy Committee voted 6-2 in favour of leaving rates and QE unchanged.
However there were some hints that the bank could hike sooner than is currently expected by the markets.
“All members agreed that any increases in Bank Rate would be expected to be at a gradual pace and to a limited extent,” the bank’s monetary policy summary said.
Markets are currently pricing in a rate rise from the MPC towards the end of next year, but the bank said “monetary policy could need to be tightened by a somewhat greater extent,” than previously expected in future.
Alongside its decision to hold rates, Britain’s central bank also released its quarterly Inflation Report, providing an update of its forecasts for overall economic growth and inflation.
The bank expects economic growth of 1.7% in 2017 and 1.6% next year, down from 1.9% and 1.7% at the last inflation report in May. Speaking to journalists after the bank’s announcements, Governor Mark Carney noted once again that uncertainty about Brexit will weigh on growth in the coming years.
Inflation is expected to peak at around 3% by October, before gradually moderating, and falling to 2.2% by 2020, the bank said.
At its simplest level, the policy dilemma facing Britain’s central bank is that it must balance surging inflation brought on by the weakened pound since the referendum with the slowdown in the economy, dwindling consumer spending, and declining inward investment.
Inflation had surged as high as 2.9% in April and May, but moderated in June, dropping to 2.6%.
In normal circumstances, such high inflation would likely push the bank to increase rates, but it must also balance the fact that the wider British economy is set to slow sharply as 2017 progresses, driven by Brexit-related uncertainty, and that the sharp growth in inflation seen in the UK right now is likely to be temporary.
MPC members judged that inflation was not far enough above target to warrant an increase in rates, noting that “attempting to offset fully the effect of weaker sterling on inflation would be achievable only at the cost of higher unemployment and, in all likelihood, even weaker income growth.”
The pound dropped on news of the bank’s decision, falling below the 1.32 level against the dollar, as the chart below illustrates: