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BOE Keeps Interest Rate Unchanged as Minority Urges Hike

Updated on
  • McCafferty, Saunders urged immediate increase to 0.75 percent
  • Policy makers will reassess outlook at next meeting in May
BOE Holds Key Interest Rate at 0.5% in 7-2 Vote

The Bank of England moved closer to raising interest rates as early as May after keeping the benchmark unchanged on Thursday.

The Monetary Policy Committee voted 7-2 to hold the rate at 0.5 percent. All 62 economists in a Bloomberg survey predicted no change. Policy makers Ian McCafferty and Michael Saunders wanted an immediate increase, arguing that slack in the economy has been used up and wage growth is accelerating.

The pound jumped to an intraday high against the dollar and the strongest since June against the euro. It then pared gains to trade little changed at $1.4141 at 12:56 p.m. London time. Market pricing of swaps curves implied an 86 percent chance of a hike in May, similar to before the decision.

Eyes on May

Swaps curves show the chance of a May rate increase has risen to 86 percent

Source: Bloomberg

“The best collective judgment 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,” the minutes of the March meeting said. “All members agreed that any future increases in bank rate were likely to be at a gradual pace and to a limited extent.”

U.K. data this week has showed the inflation rate slipped to 2.7 percent in February as the effect of the pound’s Brexit- referendum drop faded, though signs of domestically generated price growth are mounting. Wages are picking up, suggesting consumer spending may strengthen.

The BOE reiterated that U.K. decision to leave the European Union is the most significant influence on the outlook. The economy has evolved in line with its most recent forecasts published in February, it said.

Read more: BOE’s biggest hawk up for one more fight

Those predictions show that excess demand will emerge by 2020 and that, while inflation will slow, it won’t return to the 2 percent target for the next three years. It will update those forecasts in May.

First-quarter growth was probably similar to the fourth quarter’s 0.4 percent, though snow may have slowed the expansion to 0.3 percent, the BOE said.

What Our Economists Say:

“The minutes of the BOE’s March meeting left it on course to raise interest rates in May. Only a surprise deterioration in the data will prevent the central bank taking that step at its next meeting.”

--Dan Hanson and Jamie Murray, Bloomberg Economics

The bank warned that an increase in protectionism could have a “significant negative impact” on global growth and would put upward pressure on inflation. U.S. President Donald Trump’s plans to impose tariffs have sparked concern that a trade war may ensue.

Read more: global momentum shows cracks

The BOE’s decision comes a day after the U.S. Federal Reserve, under new Chairman Jerome Powell, raised interest rates for the sixth time since 2015. Closer to home, the European Central Bank is considering whether to bring a halt to its bond-buying program this year, putting it on track to start raising rates in 2019.

— With assistance by Harumi Ichikura, Andrew Atkinson, Lucy Meakin, Jill Ward, David Goodman, and Maria Tadeo

(Updates with market expectations for May in third paragraph.)
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