BoE keeps key rate at 0.50 pct

British inflation holds at 14-month low

LONDON, June 21, (Agencies): The Bank of England left its key interest rate at 0.50 percent in an announcement Thursday following a regular meeting, as British inflation holds at a 14-month low.

BoE policymakers voted 6-3 to keep the rate on hold, down from the 7-2 result last time round, indicating that the central bank could hike borrowing costs at its next meeting in August, matching some analysts’ expectations.

Also at its June meeting meanwhile, the bank voted unanimously to maintain its quantitative easing stimulus policy, under which it has pumped £445 billion ($586 billion, 506 billion euros) around the UK economy.

“A vote of 6-3 to leave interest rates unchanged at 0.5 percent and quantitative easing unchanged ... suggests that the Bank of England is closer to the European Central Bank rather than the more aggressive US Federal Reserve in its outlook, with any tightening of monetary policy likely to come slowly and in modest steps,” said AJ Bell investment director Russ Mould.

The pound nevertheless rallied against the dollar on increased expectations that a rate hike could now occur before the end of the summer.

“The pound has been given a significant boost by the Bank of England after policymakers voted 6-3 in favour of leaving interest rates unchanged, with Andy Haldane joining Ian McCafferty and Michael Saunders in voting for a (quarter-point) hike,” noted Craig Erlam, analyst at Oanda trading group.

“Policymakers stuck to their view that first quarter (growth) weakness will prove temporary, which given that this was primarily behind their decision not to raise rates last month, suggests August is very much a live meeting.”

In minutes of the two-day meeting that ended Wednesday, the BoE said that UK inflation “is expected to pick up by slightly more than projected ... reflecting higher dollar oil prices and a weaker sterling exchange rate”.

At the same time, Britain’s economy has grown at the slowest pace in more than five years, with gross domestic product of only 0.1 percent in the first three months of this year.

After Britain voted in June 2016 in favour of exiting the European Union, the Bank of England quickly cut its main interest rate by a quarter point to 0.25 percent.

It has since lifted borrowing costs back up to 0.50 percent to help bring down inflation.

At the end of last year Britain was the slowest-growing economy among the G7 group of rich nations, as businesses held back from investing ahead of Brexit and high inflation triggered by the 2016 referendum eroded households’ disposable income.

Inflation is drifting down from a five-year high of 3.1 percent hit in November, and growth in the first three months of the year was the slowest since 2012, after snow storms worsened existing weaknesses in the world’s fifth-largest economy.

But with unemployment at its lowest since 1975, the BoE says the economy is running near full capacity, and that the longer-term direction for interest rates over the next two to three years is likely to be up.

“I’m expecting a baby step in a more hawkish direction,” said Alan Clarke, a financial markets strategist at Scotiabank.

Economists had expected the BoE to raise rates in May, until a string of weak data and discouraging words from BoE Governor Mark Carney in April quashed those expectations.

Last month the BoE said it wanted to see signs of stronger growth before it prepared to raise rates, in sharp contrast to the United States, where the Federal Reserve has raised rates twice this year and plans to do so twice more.

Since then, figures have been mixed. April industrial output, construction and trade numbers were strikingly weak, and inflation has fallen to a oneyear low.