BoE keeps rates on hold pending economy's performance in 2H2018

BoE keeps rates on hold pending economy's performance in 2H2018

BoE keeps rates on hold pending economy's performance in 2H2018

Kevin Doran, chief investment officer at AJ Bell, said: "In a world where other central banks are seeking to normalise their rates, the combination of slow growth and Brexit uncertainty must surely be raising some concerns about the size of the current account deficit". The Bank of England had upgraded its growth forecasts and in March two members of the MPC broke ranks and voted for an immediate rate rise.

The preliminary estimate of GDP growth in the first quarter was 0.1%, 0.3 percentage points lower than expected in February. This is partly down to the assessment that part of the sluggish growth over the first quarter of this year was partly related to the bad weather when the "Beast from the East" hit slowing down economic activity.

In April the rise was all but certain with a spate of bullish British data pointing towards a significant uptick in the UK's performance, dropping throughout the month. The near-stalling of the economy has led the MPC to cut its annual growth forecast to 1.4% for this year, although it has left its forecasts for 2019 and 2020 unchanged at 1.7%.

CPI inflation fell to 2.5% in March, lower than expected at the time of the February Report.

Policymakers Ian McCafferty and Michael Saunders, who again voted for a rate rise, agreed the weak growth so far this year reflected "temporary or erratic factors", but said delaying a rate hike risked more abrupt tightening later on.

Inflation is also expected to be lower in 2018 than expected three months ago, at 2.4% rather than 2.7%.

The Bank believes the economy has the potential to grow at about 1.5% a year but that demand will slightly exceed that limit in the coming years in the absence of a gentle increase in interest rates. If this rebounds as they expect then it is likely we could see a rate rise at any one of the upcoming meetings including June.

The BoE said the weakening of inflation was due to a faster fading of the impact of sterling's plunge on import prices, and domestic inflation pressures continued to rise.

However, that judgement relies on the economic data evolving broadly in line with the Committee's projections'. The MPC members want to wait and see how economic data unfolds before making a decision, and all members agreed that any future increases in interest rates are "likely to be at a gradual pace and to a limited extent".

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