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Bank of England votes to hold interest rates at 0.5%


The Bank of England has kept interest rates on hold but pressure for an increase has grown on the monetary policy committee (MPC).

Minutes from the meeting showed that the bank’s chief economist Andy Haldane had joined two other members of the rate-setting committee in voting for a hike.

The bank left its benchmark rate at 0.5% as was widely expected by economists.
Sterling rose from a seven-month low to $1.32 after the decision on hopes it was moving towards raising rates in August or November. The export-heavy FTSE 100 was down 0.7%.
“There was a small element of surprise in the voting, with the bank’s chief economist Andy Haldane joining Michael Saunders and perma-hawk Ian McCafferty in calling for an immediate rate rise,” said Ben Brettell, senior economist at Hargreaves Lansdown.
“Economists had expected a 7-2 split, but in the event a forecast uptick in inflation was enough to split the committee 6-3.”
He added: “Sterling jumped on the news, gaining almost a cent against the dollar as traders factored in a bigger chance of a move in August.
“But on balance I still think we might not see a rate rise for the rest of the year – policymakers will at the very least want confirmation that the weak first-quarter growth figure was just a blip before raising borrowing costs.”
The Bank of England has been holding off raising interest rates as it awaits an improvement in the economy, which grew just 0.1% in the first three months of the year.

It believes this was a blip and the economy is bouncing back from the unusually cold weather in late February and early March.
“A number of indicators of household spending and sentiment have bounced back strongly from what appeared to be erratic weakness in Q1, in part related to the adverse weather,” the bank said.
“Employment growth has remained solid. Although manufacturing output recorded a decline in April, and this was accompanied by a fall in goods exports, surveys of business activity have been stable and, as a whole, point to growth in the second quarter in line with the Committee’s May projections,” it added.
Although inflation is coming off a five-year high of 3.1%, the bank warned the cost of living is likely to rise.
“Inflation is expected to pick up by slightly more than projected in May in the near term, reflecting higher dollar oil prices and a weaker sterling exchange rate. Most indicators of pay growth have picked up over the past year and the labour market remains tight, suggesting that domestic cost pressures will continue to firm gradually, as expected,” the bank said.
Neil Wilson, chief markets analyst, at Markets.com said: “Policymakers were also a tad more hawkishness on inflation, with the MPC seeing price growth picking up faster in the near term than it did in May.

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But higher oil prices and weaker sterling is not a cocktail for the bank to tighten any more than currently expected.”
The bank also took the step of indicating it would unwind its extraordinary crisis-era £435bn stimulus programme when interest rates are around 1.5% and not 2% as it had previously stated.

Source: Sky

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