Bank of England keeps rates at record low as economy slows

Lucy Hill
June 16, 2017

It gives the Bank of England very little fire power should the economy turn.

Volatility has been a theme this week, with USD/GBP fluctuating between lows of 0.7805 and highs of 0.7910 since Monday.

The US Dollar briefly plunged on Wednesday as investors reacted to news that US consumer prices had slowed much further than expected in May.

The Bank of England also said it expects inflation to read above 3 percent in the coming months, which is above its prior forecasts of 2 percent.

However, the final results were worse than expected. Inflation is seen at 0.8 percent in May, unchanged from the flash estimate.

This came after the US Federal Reserve raised its benchmark rate last night, and flagged it was going to start reducing its balance sheet.

A Reuters poll of 21 of the 23 primary dealers that do business directly with the Fed showed 14 of them now believed it would announce the start of its balance sheet normalisation at its September 19-20 policy meeting.

"With the United Kingdom economy stuttering, economic and political uncertainty magnified by the election result and earnings growth very weak, a compelling case can still be made for the Bank of England to hold off from any interest rate hike - not just now but for some time to come".

Sterling has fallen by around 2.5 percent compared to the 15 working day average used in the BOE's May Inflation Report, with a substantial part of the depreciation coming about as a outcome of the General Election last week. This has limited Dollars strength.

The BoE's latest policy meeting showed three MPC members called for a rate rise.

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Nick Dixon, Investment Director at Aegon, commented: "The high inflationary environment has not been enough to force Carney's hand on interest rates, but in the shadow of monetary normalisation in the U.S., pressure is mounting for the Monetary Policy Committee to follow suit".

Known hawk of the Monetary Policy Committee (MPC) Kristin Forbes was joined by Ian McCafferty and Michael Saunders this month in voting for tighter rates, leaving a 5-3 split to leave rates frozen.

The remaining five members of the panel, including Gov. Mark Carney, voted to stay put for now, citing uncertainty over the outlook for growth, the minutes record.

"Indeed the central bank has itself highlighted weaker consumer spending as a key risk to the United Kingdom economy, so now this particular chicken is coming home to roost, it's unusual that the BoE is thinking about releasing the foxes".

This will have a significant negative effect on growth and comes off the back of other weak economic data in recent days and weeks, including evidence of falling consumer confidence and business confidence, and of falling retail sales.

For in the minutes accompanying today's interest rate decision (which was, unsusprisingly, a no-change) there was a real surprise.

"This week's run of softer data will doubtless dent the NZD's shiny armour, but while disappointing, the data were only relatively minor misses, and in level terms, New Zealand's economic credentials remain sound", said David Croy, senior rates strategist at ANZ Bank New Zealand, in a note.

Friday's U.S. data includes the publication of Michigan's June consumer sentiment survey, as well as United States building permits and housing starts from May.

Over in the United Kingdom, investors are likely to continue to react to this week's economic news as well as any political developments.

Britain's Prime Minister Theresa May leaves after a meeting with the Leader of Northern Ireland's Democratic Unionist Party (DUP) Arlene Foster at 10 Downing Street after the general election in London, Tuesday, June 13, 2017.

Other reports by TheDailyFarc

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