Committee votes for no change

Interest rates kept on hold at 0.25%

Mark Carney AugustBank of England rate setters kept interest rates at 0.25% and raised its inflation forecast to 2.7% by the end 2017.

The decision was taken largely because of the stronger economy and the slump in the pound which strengthened on the ruling on the Brexit vote.

The pound was up 1.25% against the euro at €1.1217, and 1.18% up on the dollar at $1.244 and the FTSE 100 was 54.91 points lower at the close at 6,790.51.

Governor Mark Carney declared “a neutral stance” on what its next move on interest rates would be.

Martin Beck, senior economic advisor to the EY ITEM Club, said: “Given the economy’s recent robust performance, the Committee’s decision to keep policy on hold was eminently predictable. But a robust economy was not the only factor behind this. Sterling’s renewed drop since September and the expectation that a weaker pound will translate more quickly to inflation also played a role.

The stronger than expected expansion in Q3 lies behind much of the upward revision to growth in 2017, from 0.8% to 1.4% – one of the largest upward revisions to year-ahead growth since 1997.

“However, the MPC remained downbeat on longer-term prospects, cutting its forecast for growth in 2018. Thanks to the spending power-sapping effects of higher inflation and concerns that Brexit-related uncertainty will persist for longer, it now expects the post-referendum hit to GDP by 2019 to be slightly larger than predicted in August. So pain delayed but not averted.

“Meanwhile, although the rise in the inflation forecast delivered the biggest overshoot relative to the 2% target since the Bank was given operational independence in 1997, in our view, the MPC still looks a tad optimistic.

“The minutes of November‘s meeting noted that there are ‘limits’ to the extent to which above target inflation can be tolerated, although no details were provided of what those limits might be. Short of a crash in the economy, this would appear to rule out further monetary easing.”

Calum Bennie, savings expert at Scottish Friendly, said: It’s scant relief to savers that interest rates are being held.

“They are already at historic lows and this month we have seen a raft of banks cutting rates on their savings accounts to as little as 0.01%.

“The outlook isn’t good for cash savers in particular as interest rates seem set to remain in the doldrums for the foreseeable future and inflation looks likely to rise in early 2017. Put simply we will have to work harder than ever to get a return on our money.”

David Lamb, head of dealing at Fexco Corporate Payments, said: “Mark Carney’s thunder hasn’t so much been stolen as disappeared.

“It takes a lot to trump the Bank of England Governor, but this morning’s successful legal challenge to Brexit managed it.

“The High Court ruling – that MPs must vote on Brexit before the UK’s divorce from the EU formally begins – is far from derailing Brexit. But it injected a surge of optimism into poundwatchers that has so far outweighed the Bank of England’s acknowledgement that interest rates will be going nowhere fast.

“With the Bank’s quarterly Inflation Report revising up the UK’s growth forecast, talk of a further cut to interest rates has been definitively quashed. But with the Bank also predicting that inflation will rise more slowly than some had been feared, it will be in no hurry to hike rates either.

“The reality is that it will take time for the higher import costs caused by the weak pound to feed through into inflation. Britain faces long-term inflationary pressure that will eventually require a rate hike.

“But in an ironic twist, the Bank’s reluctance to increase rates to tackle inflation in the medium term will keep sterling weak and so stoke inflation in the longer-term.

“With the prospect of an interest rate hike punted well into the long grass, today’s surge in sterling can only be attributed to one thing – the very large spanner inserted into Brexit by Britain’s High Court.”

Leave a Reply

Your email address will not be published. Required fields are marked as *

This site uses Akismet to reduce spam. Learn how your comment data is processed.