The Bank of England left interest rates unchanged today as attention focused on its views of Brexit developments.
The nine member monetary policy committee voted unanimously in favour of no change to the 0.5% rate.
The US Federal Reserve yesterday raised its rates a quarter point to 1.25 % – 1.50% but the Bank of England is forecast to take a measured view of rate rises as inflation continues to squeeze consumer spending and unemployment rises amid subdued growth.
Its caution is reflected in the uncertainty over the EU withdrawal talks and how these will play out in the new year.
Sterling edged higher as traders awaited the decision and watched for signs of whether recent progress in Brexit talks and higher UK inflation could speed up the pace of future interest rate hikes.
The pound hit a high of $1.3467 after stronger than expected retail sales data, before slipping back to $1.3447. Against the euro, the pound was up a quarter of a percent on the day at 87.91p.
Nick Dixon, investment director at Aegon said: “Last month’s increase in interest rates, for the first time in a decade, was well flagged as the starting point in the Monetary Policy Committee’s drive to end the era of cheap money.
“However, it was always going to be highly unlikely that the Bank of England would announce a further rate rise this side of Christmas.
“That said, this week’s inflation figures will make uncomfortable reading for Mark Carney, given previous predictions that inflation had already peaked.
“With pressure on for wage increases and political demand for looser fiscal policy, the governor will worry about the potential for high inflation to become embedded. In our view it’s likely that rates will rise sooner than people expect and we may not have to wait long in the new year for another rate increase.”
The European Central Bank kept its rates on hold and aised growth and inflation forecasts for the euro area while sticking to its pledge to provide stimulus for as long as needed, predicting inflation would remain below target into 2020. The euro rose to a day high of $1.186.
David Lamb, head of dealing at Fexco Coporate Payments, said: “Mark Carney is choosing to ignore the UK’s runaway inflation and refusing to raise interest rates for fear of torpedoing Britain’s increasingly anaemic growth.
“Meanwhile, Mario Draghi is just as dogmatic in his dovishness, despite being blessed with a Eurozone economy that is firing on all cylinders at only modest inflationary cost.”
Michael Hewson, chief market analyst at CMC Markets, thinks that with inflation at 3.1% – above the government target of 2% – the Bank of England “could get away with pushing interest rates up again “, though he feels a rate rise from the current level isn’t on the agenda any time soon.
Dean Turner, UK economist at UBS Wealth Management, notes that the UK has fallen from the top to the bottom of the G7 growth table and that investment in big projects has been held back until there is greater certainty over the Brexit talks.
He expects progress to be made, particularly on the transition agreement, paving the way for the economy to pick up.
“If growth comes in net year at 1.5% then it may have the confidence for another hike in interest rates,” Mr Turner said during a visit to Edinburgh.
Commenting on last night’s US decision, Tom Stevenson, investment director for Personal Investing at Fidelity International, said: “With today’s move so widely telegraphed, attention is instead on the expected path of interest rates next year.
“The so-called dot plots, which show rate-setters forecasts for future interest rates, continue to show that the Fed estimates a further three quarter point increments in 2018, pushing interest rates to 2%-2.25% by the end of 2018.However, further out the Fed is slightly more dovish about the pace of tightening.
“Whether the Fed will be able to follow through on this pace of tightening next year will of course hinge on a number of economic factors as well as the Trump administration’s ability to successfully push through tax reforms. If taxes are cut as expected, higher growth will give the Fed enough room to push through its expected three rate hikes or even more next year.
“The market is unconvinced by this. Futures point to only two rate hikes next year with the Fed running out of inflation to justify its proposed tightening path.
“If 2018 plays out like 2017, with three rate hikes from the Fed, this could spell bad news for bond prices. We have already seen bond yields rise on the assumption that rates would be hiked today and if rates and yields continue to push higher, we would expect a line to be drawn under the 30-year bond bull market.
“However, rising rates could be a good thing for certain sectors of the equity market.
“Having dragged forward much of the growth potential from 2018 to 2017, stock markets are particularly exposed to the Fed’s decisions. The New Year will be a good time to get active again. Volatile markets will reward stock-pickers in 2018.”