Bank Of England Keeps Record Low Rate, Signals Hike In Coming Months

Bank Of England Keeps Record Low Rate, Signals Hike In Coming Months

The Bank of England retained its record low interest rate on Thursday, but hinted at raising rates over the coming months to bring inflation back to the target.

The Monetary Policy Committee voted 7-2 to hold the interest rate at a record low 0.25 percent. But all nine members voted to maintain the quantitative easing at GBP 435 billion.

Ian McCafferty and Michael Saunders maintained their call for a quarter point rate hike at the meeting. The new member Dave Ramsden preferred to keep the rate unchanged.

Economists had also expected BoE chief economist Andrew Haldane to join the hawks after inflation shot up to 2.9 percent in August, which was the joint highest in over five years.

According to the BoE minutes, some members said a withdrawal of part of the stimulus injected in August last year would help to moderate the inflation overshoot, while leaving monetary policy very supportive.

The BoE continues to expect inflation to overshoot the 2 percent target over the next three years. Although underlying pay growth has shown some signs of recovery, growth remains moderate, the bank said.

Since the August Inflation Report, data suggested slightly stronger picture than anticipated, the bank noted. Further, spare capacity in the economy is being absorbed a little more rapidly than expected in August.

If the economy were to follow a path broadly consistent with August Inflation Report, all members said monetary policy could need to be tightened by a somewhat greater extent than current market expectations.

All members agreed that any prospective increases in Bank Rate would be expected to be at a gradual pace and to a limited extent.

Policymakers said there remain considerable risks to the outlook, which include the response of households, businesses and financial markets to developments related to the process of EU withdrawal.

ING Bank economist James Knightley said he does not rule out the possibility that the BoE reverses last August's emergency rate cut quite soon, but economic uncertainty relating to Brexit and the risks this poses for activity means that such action would not be the start of a new tightening cycle.

SOURCE

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