LONDON — The Bank of England confirmed on Thursday that its base interest rate, as well as its quantitative easing programme, will remain unchanged after the March meeting of its Monetary Policy Committee.
At 12.00 p.m. GMT (8.00 a.m. ET) Britain’s central bank held rates at 0.25% and maintained its ceiling for bond buying at £435 billion. The decision was delivered with eight members of the bank’s Monetary Policy Committee voting to leave rates unchanged, and one, outgoing member Kristin Forbes, voting to increase rates.
The Old Lady of Threadneedle Street has been on hold since August 2016, when it cut interest rates from 0.5%, and boosted its QE programme, as a means to protect the UK from the coming economic shock of Brexit.
In January, Governor Mark Carney said in a speech he believes the bank saved up to 250,000 jobs with those measures.
While the actual decisions of the MPC were fairly straightforward, the minutes of the meeting suggest that several members of the committee would consider voting to increase rates in the near future, striking a more hawkish tone.
“There are limits to the extent that above-target inflation can be tolerated,” the bank said, adding (emphasis ours):
“With inflation rising sharply, and only mixed evidence on slowing activity domestically, some members noted that it would take relatively little further upside news on the prospects for activity or inflation for them to consider that a more immediate reduction in policy support might be warranted.”
Inflation is surging thanks largely to the slump in the pound since the Brexit vote, hitting 1.8% last month. In normal circumstances, rising inflation would likely see the bank raise interest rates to offset this impact.
However, while inflation is on the rise, real wage growth is stagnating and retail sales are beginning to cool, suggesting that the negative impacts of Brexit on the UK’s economy are starting to bite, leaving the BOE with a tough juggling act.
The bank currently maintains a neutral stance on rates — meaning it has no bias toward cutting or hiking — but hints from the minutes suggest that an upwards move in interest rates is not entirely out of the question in the near future.
The MPC’s mild hawkish turn is offset by some other areas of its report, with one section noting:
“The continuing suitability of the current policy stance depends on the trade-off between above-target inflation and slack in the economy. The projections described in the February Inflation Report depend in good part on three main judgements: that the lower level of sterling continues to boost consumer prices broadly as expected, and without adverse consequences for expectations of inflation further ahead; that regular pay growth does indeed remain modest, consistent with the Committee’s updated assessment of the remaining degree of slack in the labour market; and that the hitherto resilient rates of household spending growth slow as real income gains weaken, without a sufficient offset by other components of demand.”
Charlotte Hogg, who resigned her position as the bank’s deputy governor for markets and banking this week after a scandal involving her failure to disclose a possible conflict of interest, used her first vote on the MPC to vote for a hold. She will continue to serve on the MPC for as long as three months while a successor is found.
The pound jumped on the news, climbing from 1.2266 against the dollar just prior to the decision to $US1.2340 around 10 minutes after it was released, a gain of 0.39% from the day’s open.
Here is the chart:
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