Bank of England keeps rates on hold, hints at May rise

Hiking Cycle       Investors see May as a near lock-in for BOE second hike this year looks likely              Source Bloomberg

The decision was widely expected, but with retail sales figures released this morning (22 March) being much more positive than expected, rising wages, and upgrades to GDP forecasts announced by the Office for Budget Responsibility (OBR) this month, interest rates are widely expected to rise in May.

"We still think that the MPC will hike interest rates in May", Paul Hollingsworth, senior United Kingdom economist at Capital Economics, said following Thursday┬┤s announcement.

"Such a path would bring us closer to the neutral policy rate, which I continue to think is likely to be well below the neutral rate that prevailed in the pre-crisis decades", Vlieghe said.

But in the BoE's view, a lack of spare capacity in the economy means it would take years for inflation to return to its 2 percent target if it does not raise rates.

Only a minority expected Saunders or McCafferty to vote for a rise.

The transition deal, which is expected to be confirmed Thursday at a meeting of European Union leaders, has, according to many economists, made it even more likely that rates will be raised in May, alongside the next set of quarterly economic projections from the Bank.

"The best collective judgement of the MPC remained that, given the prospect of excess demand over the forecast period, an ongoing tightening of monetary policy over the forecast period would be appropriate", said the minutes of this month's meeting. Sterling's seven-week high against the dollar, shortly after noon on Wednesday, came as two members of the bank surprised investors by calling for a rate increase.

Early estimates among its staff suggest growth may slow to 0.3% in the first quarter from 0.4% at the end of 2017.

Burton Mills economists did not expect the BoE to follow up on its November rate hike with another in March but do anticipate that borrowing costs will be hiked from their current rate of 0.5 percent in May.

The committee meets monthly to discuss whether to cut, raise or leave interest rates unchanged, as well as other measures such as quantitative easing.

CPI inflation fell from 3.0% in January to 2.7% in February.

"The transition deal extends the period of uncertainty, but also pushes any significant economic hit into 2019 and beyond", said Professor Peter Urwin of Westminster Business School, who is one of the few Bank of England watchers who sees a chance of three rate rises this year.

There will be two factors to focus on - the BoE's minutes for its latest Monetary Policy Committee (MPC) meeting, and the press conference given by BoE Governor Mark Carney.

But the BoE is likely to point to a sharp pick-up in wage growth to a two-and-a-half year high of 2.8 percent as cementing the case for a move in May.

Sterling slipped to 1.41 USA dollars.

British inflation jumped past year and remains at an elevated level after Britain voted to leave the European Union in 2016.


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