MPC votes 7-2 to hold Bank Rate at 0.5%

MPC votes 7-2 to hold Bank Rate at 0.5%

Sterling on Friday headed for its fourth successive weekly decline versus the dollar, in what would be a first for the currency since 2015, after the Bank of England held rates and cut its economic growth projections.

It expects the Office of National Statistics to revise up its Q1 growth figure eventually. Britain's economy grew more slowly than most of its peers previous year, after a Brexit-driven jump in inflation hit consumer spending power and some businesses delayed long-term investment.

Economists had previously expected two rises in 2018 after the Bank's February forecasts, when Governor Mark Carney said rates would need to rise further and faster to rein in inflation.

The announcement comes just weeks after observers seemed nearly unanimous in their predictions of a May rise in interest rates.

Analysts at Deutsche Bank note that the BoE kept rates on hold yesterday as widely expected, but the vote was not unanimous (7-2), with both Saunders and McCafferty dissenting as they did in February.

"The signals from the Bank if you go back to before those outcomes was quite clear that they had the intention to hike". Consequently, the Bank is optimistic that the economy will pick up somewhat in the near future (obviously, this will depend if any unseasonably cold "Brexit headwinds" start to blow which might jeopardise the transitional agreement). 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%. The inflation rates of the most import-intensive components of the CPI appear to have peaked.

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The Bank has described recent disappointing economic data as a "temporary soft patch", implying rates will rise in the fullness of time (with interest rates near an all time low, this is one of the safest of bets and only a question of timing).

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.

It added it continued to believe an "ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target at a conventional horizon".

"We fully expect the current scepticism of the BoE's guidance to ebb away, which will provide increased support for the pound as we advance toward the next key policy meeting on 2nd August", said Lee Hardman, FX strategist at MUFG. "Survey indicators, and evidence from the Bank's (regional) agents, suggested that growth had been somewhat stronger in the first quarter than implied by the preliminary estimate".

Two MPC members wanted to increase rates this month, citing the strength of labor market, where unemployment is the lowest since the 1970s and wage growth is picking up, fueling domestically generated inflation.

Financial markets have made a similar about-face.

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