Bank of England keeps rates at record low as economy slows

Posted June 16, 2017

In August 2016, policymakers at the United Kingdom central bank voted unanimously to bring interest rates to a record low of 0.25%, amid fears of a disruptive economic fallout from the Brexit referendum. The Fed expects that inflation will not hit the current target, of two percent, and it has revealed plans for unwinding the post-asset purchasing balance sheet, which now totals nearly $4.5 trillion.

Corporate bond purchases stock will remain at £10bn, while United Kingdom government bond purchases stay at £435bn.

The MPC set out its most recent assessment of the outlook for inflation and activity in the May Inflation Report.

Retail sales fell by more than expected in May as consumers were hit in the pocket by high inflation, official data showed Thursday.

But the minutes record their unease after annual inflation accelerated to 2.9% in May, well in excess of the BOE's 2% goal and the bank's own forecasts.

It reached 2.9 percent in May, above the MPC's expectation.

"Inflation could rise above 3% by the autumn, and is likely to remain above the target for an extended period as sterling's depreciation continues to feed through into the prices of consumer goods and services", the bank's monetary policy statement said.

Pay growth has moderated further from already subdued rates, even as the unemployment rate has fallen to 4.6%, its lowest in over 40 years.

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Britain had the slowest economic growth in the G7 in the first three months of 2017.

"A slowdown in household consumption and gross domestic product as a whole had recently begun. although consumer confidence had held up, there had been further signs of a slowing housing market and new auto registrations had fallen sharply", the Bank added in the minutes. Most surveys of investment intentions have remained above their historic averages.

This was at odds with the Bank's predictions for growth of 0.4% between January and March, although the latest surveys from the main sectors suggest a slight pick-up in the second quarter.

"The widening gap between inflation and wages poses a significant challenge for the Bank and it was indeed lower household income growth and persistent low consumption that formed the focus of the meeting's discussions".

A stronger pound can hurt multinational companies on the FTSE 100 as most make the bulk of their revenue overseas.

In the policy summary, there were comments that the continued growth of employment could indicate that spare capacity in the economy is being eroded, lessening the trade-off that the MPC needs to balance and reducing the MPC's tolerance of above-target inflation.

The bank said clear signs of demand pressures call for a tight monetary policy stance so as to ensure medium-term price stability. The first is that this is not the first time some MPC members have argued for higher rates, and then later changed their minds. That surprised market participants who had taken the view that the Bank of England would look through the present high inflation rate for fear that an interest rate increase would harm the United Kingdom economy.

Later on Thursday BoE Governor Mark Carney is due to give a speech to London bankers alongside Chancellor of the Exchequer Philip Hammond, who is expected to focus on Britain's future European Union ties.