Bank of England holds rates steady, sees two hikes in the next three years

Big 5

The Bank of England (BOE) held on Thursday interest rates steady at 0.25 percent, as expected, while largely sticking to its previous assumptions for growth and inflation over the three-year forecast horizon.

The Monetary Policy Committee (MPC) voted by a majority of 6-2 to keep rates at record low levels in August.

Meantime, the U.K.’s central bank maintained stock levels of government bonds and corporate bonds at £435 billion and £10 billion respectively.

The MPC also said it forecast two interest rate hikes over the next three years, one more than it had estimated previously. Governor Mark Carney and his fellow rate-setters said the first rate hike would likely take place in the third quarter of 2018.

Sterling fell against the dollar on the decision, with the currency hitting a nine-month low against the euro at 90.0 pence. Yields on the 10-year U.K. government bond also fell lower after the news.

According to the minutes, “if the economy follows a path broadly consistent with the August central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period.”

As originally envisaged, the Committee also voted unanimously to close the drawdown period for the Term Funding Scheme (TFS). The scheme had been brought in 12 months earlier as part of an emergency rate cut in order to support domestic banks in the wake of the EU referendum result.

Sluggish growth rates

While the Bank’s growth outlook remains similar to its previous forecast in May, the central bank’s forecasters have again reduced their outlook for 2017 growth. The BOE estimates a 1.7 percent increase by year-end rather than May’s 1.9 percent estimate.

Looking ahead, the Bank has made a slight tweak to its GDP (gross domestic product) estimates over a three-year period. The MPC now sees growth at 1.6 percent in 2018, down from 1.7 percent, while GDP in 2019 remains at 1.8 percent.

The BOE’s outlook for inflation is broadly similar to that in May too. However, the MPC predicted “significant upward pressure” from import prices in the coming months and for inflation to peak at around 3 percent in October. The Bank’s current inflation target is 2 percent.

When they last met in June, rate-setters on Threadneedle Street voted by a narrow 5-3 margin to keep interest rates at 0.25 percent. The surprisingly close decision fueled speculation that the BOE would soon be ready to lift borrowing costs and follow in the footsteps of the U.S. Federal Reserve.

However, economic data since the central bank’s June meeting appeared to hamper the case for hawks – those who would prefer an end to easy monetary policy. Sluggish growth rates in the first half of the year, an unexpected slip in inflation and weak wage growth all attributed to a 6-2 vote in favor of maintaining rates at record low levels.

Meanwhile, formal Brexit talks between the U.K. and the European Union have endured a somewhat bumpy start, leaving many firms anxious about the risk of a damaging divorce in 2019.

May hike next year?

Personnel shuffling at the top also strengthened the hand of dovish rate-setters. Kristin Forbes, one of the MPC (Monetary Policy Committee) members to back a rate rise in June, departed the group and was replaced by Silvia Tenreyro, an academic at the London School of Economics. Tenreyro voted with Governor Mark Carney to maintain interest rates, leaving Ian McCafferty and Michael Saunders as the two dissenters.

The minutes from its last meeting, also released on Thursday, suggested that markets may have gone too far in expecting rates to remain on hold until around the third quarter 2018, according to Paul Hollingsworth, the U.K. economist at Capital Economics.

This indicates that if the economy evolves in line with the MPC’s latest forecasts, then policy would need to be tightened by a “somewhat greater extent” than currently priced in, he added.

“We continue to think that the first hike will come in May next year alongside the Inflation Report,” he said in statement on Thursday afternoon.

Source: CNBC