Bank holds rates at 0.5% after slowdown in growth
THE Bank of England has backed away from raising interest rates following a sharp slowdown in growth.
But it signalled hikes are still on the way, with the economy set to bounce back from a weather-hit “soft patch”.
The Monetary Policy Committee (MPC) voted 7-2 to keep rates at 0.5% following the shock slowdown in growth to 0.1% in the first quarter as the impact of the Beast from the East compounded woes in consumer and construction sectors.
The dire first-quarter performance saw the Bank downgrade its 2018 growth forecast to 1.4%, from 1.8% predicted in February, though forecasts remained unchanged at 1.7% in 2019 and 2020.
But the Bank said it expected the first-quarter growth figures to be revised higher, estimating underlying growth at around 0.3%, while it added activity would bounce back in the second quarter.
And while Brexit-fuelled inflation has fallen sharper than expected in recent months, the Bank said rate hikes would still be needed over the next three years, with cost pressures building in the economy.
In minutes of the MPC meeting, the Bank said: “Weakness in the data for the first quarter had been consistent with a temporary soft patch, with few implications for the current degree of slack or for the outlook for the UK economy.”
It added it still believed an “ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target at a conventional horizon”. Sterling fell on the news and was trading lower by 0.2% against the US dollar at 1.352. Versus the euro, the pound slumped 0.4% to around 1.138
Financial markets had seen a rate hike this month as a near certainty until the recent first-quarter data shock and subsequent gloomy reports from different sectors of the economy.
The Bank’s forecasts are still based on financial market expectations for three rates rises over the next three years, with one seen later in 2018 followed by another in 2019 and one in 2020, to bring inflation back to the 2% target in two years.
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.
Minutes of the meeting showed that most MPC members now wanted to wait to see “how the data unfolded” over the coming months.
“The costs to waiting for additional information were likely to be modest,” according to the report.
For the two dissenters on the MPC – Ian McCafferty and Michael Saunders – the case for an immediate rate rise had not changed, given the “temporary or erratic” first-quarter growth data.
They repeated their calls for a rise to 0.75% to avoid more “abrupt” policy action further down the line.
For them, inflation – which fell to a lower-than-expected 2.5% in March – was easing back as the impact of the Brexit-hit pound begins to fall away and would start to see upward pressure as wages pick up and other costs rise.
But the Bank’s quarterly forecasts revealed there was some doubt about the underlying economic picture in the UK, clouded by the recent weather impact, with the Bank noting “greater than usual uncertainty” over consumer spending. Retail sales have been hit particularly hard, with the housing sector and consumer borrowing market also showing weakness.
The inflation forecasts also show that any lost economic output in the first quarter would not be recovered during the remainder of the year, despite expectations for the second quarter to be “commensurately stronger”.