Investors price in chance BoE rates on hold until 2019

Mark Carney

The Bank of England kept its key interest rate on hold today.

Alex Brandreth, deputy CIO at Brown Shipley, said: "While interest rates remain unchanged, it does look like policy direction is going to change in the near future and we believe a period of interest rate hikes lies ahead for the UK".

It is, effectively, the fundamental interest rate on which most commercial interest rates on standard bank accounts and loans are ultimately based (though of course other things like risk will play a part when calculating interest on loans).

The pound, which had risen to a high of nearly $1.44 on the expectation of a May rate hike, fell close to $1.35 on the decision.

Just a few weeks ago markets and economists were convinced the Bank of England was all set to hike interest rates on May 10, until Governor Mark Carney gave a surprisingly dovish interview and suddenly all bets were off.

Worse than expected economic performance at the start of the year has led Bank of England's Monetary Policy Committee to hold off on increasing the base rate above 0.5%. Inflation fell faster than the BoE had expected and the economy grew at its slowest annual rate in five years in early 2018. Accordingly, the Bank has trimmed its full year growth forecast (issued in February) down from 1.8% to 1.4%.

"There is also a little three-month wiggle room for those who like a fixed rate comfort blanket". This is likely in part to have reflected adverse weather in late February and early March.

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Since he joined the BoE in 2013, Mr Carney has signalled several times that the time was nearing for rates to rise from the historic low of 0.5 per cent reached during the 2008-09 financial crisis, only for economic data to surprise him.

Alongside the decisions, the Bank of England also released its quarterly Inflation Report, providing an update on its economic forecasts, predicting that the United Kingdom economy will grow at average of around 1.75% over the next handful of years.

"It is notable though that the minutes indicate that most MPC members want to see how the economic data evolves over the coming months to make sure that the first quarter slowdown was temporary", said Archer.

Rain Newton-Smith, Confederation of British Industry's chief economist, said: "The MPC was clearly swayed by a series of softer economic data recently, and is waiting to see whether this marks the beginning of a more prolonged slow patch".

Besides making financial markets more volatile, the uncertainty on the path of interest rates can complicate planning for companies and households that have to decide, for example, when to take out a loan or repay debt.

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

Bank of Japan Governor Haruhiko Kuroda jolted markets in March when he told parliament the central bank could consider and debate exiting its ultra-easy policy if inflation hit its 2 percent target as projected in the fiscal year ending in March 2020.

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