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Bank votes for no change

Interest rates ‘to remain unchanged until next year’

Mark Carney: weak investment

Bank of England rate setters today hinted that interest rates would remain at their record low of 0.25% until next year.

After voting to maintain borrowing levels at the same level set last August the Bank revealed that the economy is “sluggish” and cut its growth targets.

The vote at the end of the monthly two-day meeting was carried by one “hawk” fewer than the 5-3 vote at the meeting in June, and one “dove” fewer than the 7-1 split in May at the last quarterly Super Thursday meeting.

Sterling fell on the news, losing most of its gains over recent days.

Governor Mark Carney said after the meeting: “It’s evident in our discussions across the country with businesses… that uncertainties about the eventual relationship are weighing on the decisions of some businesses.

“Investment has been weaker than we otherwise would have expected in a very strong world… So the consequence of that is starting to build… The judgement of the MPC… is that while we will see a rotation towards business investment… it is still below historic rates… the speed limit of the economy, if you will, has slowed.”

There has not been a rise in interest rates since July 2007. Economists and other analysts were divided on how the next few months will play out.

David Lamb, head of dealing at Fexco Corporate Payments said:  “The Pound has been hit by a dovish double-whammy.

“The Monetary Policy Committee has returned firmly to type, with an increased number of the Bank’s rate-setting grandees voting for the dovish orthodoxy.

“And with the Bank’s Inflation Report predicting both a slowdown in economic growth and continued rising inflation, the doves are now set to rule the roost for the foreseeable future.

“Translation – we shouldn’t expect an interest rate rise at least until the start of 2018.

“The combination of these two signals from the Bank have hit sterling like a bucket of cold water, and prompted the pound to lose most of the gains it made against the Dollar earlier this week.

“Meanwhile it’s in full retreat against the Euro, sliding to its lowest level for nine months.

“With the MPC so wary of derailing Britain’s fragile growth with a rate rise – and the Bank forecasting further economic weakness – the prospects of a rate hike have once again disappeared below the horizon. Sterling’s brief spell of strength has sunk with them.”

Tom Stevenson, investment director for personal investing at Fidelity International, said: “It seems the bank is reluctant to rock the economic recovery by hiking rates just yet and the Bank’s view on growth has also been downgraded since the May meeting.

“Three months ago, the Bank expected GDP to rise by 1.9% in 2017, 1.7% in 2018 and 1.8% in 2019. This time, the equivalent forecasts are 1.7%, 1.6% and 1.8%.  

“What’s driving that sluggish growth is the other key figure in today’s smorgasbord of data – inflation. While growth is running a bit cooler than expected, inflation is a bit hotter in the near term and safely above the Bank’s 2% target.

“And that is squeezing consumers’ spending power because household earnings are not keeping pace with prices. Again, the Bank has tweaked its expectations on inflation.

“Three months ago, it was looking for prices to rise by 2.6% this year, by 2.6% in 2018 and 2.2% in 2019. Today’s forecasts are respectively 2.7%, 2.6% and 2.2%.”

Nick Dixon, investment director at Aegon said:It was widely expected that the Bank of England would keep interest rates at their current level for the time being given uncertainty surrounding the UK economy.

“While the latest inflation figures showed a small dip to 2.6% from May’s high of 2.9%, longer term upwards trends remain a concern for the Monetary Policy Committee and further price pressure will prompt a rate rise.

“Those in retirement, or about to retire, are among the most affected by these macro drivers given their reliance on savings income. It’s imperative that people review their portfolios to ensure they are ‘inflation resilient’.  For retirees seeking income which can keep pace with inflation, diversified portfolios with predictable equity dividends should be a key part of their investment mix.”

 

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