BOE to hold interest rates at 0.25%

Casey Dawson
August 4, 2017

Bank policymakers, including Governor Mark Carney, voted to cut interest rates to a fresh low of 0.25 per cent a year ago as part of a four-pronged stimulus package created to support jobs and growth.

In its latest report, the National Institute of Economic and Social Research (NIESR) predicted the Bank would raise rates in the first quarter of next year as the economy starts to recover.

The Bank cut its forecast for economic growth this year from 1.9% to 1.7% and cut next year's forecast from 1.7% to 1.6%.

In corporate news, clothing retailer Next surged as full price sales were up in the second quarter and the company confirmed a third special dividend of 45p and said £307m of surplus cash is expected this year, up from guidance of £255m in May.

The Bank also warned household disposable incomes were likely to fall in real terms, caused by the falling pound.

Longworth, who resigned from the British Chamber of Commerce (BCC) to serve as Chairman of the Vote Leave Business Council before the Brexit vote, said that membership of the single market was stopping the UK Government from growing the economy.

The Pound has fallen 0.9% so far against the Dollar after the announcement of the freeze in interest rates, which has a direct impact on foreign exchange rates.

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Despite the majority vote for a rate hold this week that warning could be taken a hawkish signal from the MPC by markets. Inflation, which will peak at about 3 per cent in October, will slow to around 2.2 per cent in 2020, just above the bank's 2 per cent target.

The assumption of a smooth Brexit will be tested. However, others, such as the International Trade Secretary Liam Fox, have cast doubt on such an outcome.

Although the central bank kept policy unchanged on 15 June, three MPC members voted to hike interest rates.

Some economists had called for a rate increase after inflation accelerated to 2.9 percent in May, well above the bank's target of 2 percent.

However, despite the downgrade to its growth outlook, the rate-setting monetary policy committee (MPC) also gave a more hawkish signal that rates could rise faster than markets are now pricing. This is fairly non-committal language and didn't convince the FX market that the BOE is serious about hiking, especially since the hawkish contingent lost one of its members at this meeting - Kirsten Forbes left in June and her replacement, Silvana Tenreyo, didn't follow her footsteps instead choosing to vote with the pack.

Surveys have suggested that investment intentions of firms are relatively strong. At the same time, increased domestic uncertainty was likely to act as a drag on investment, and there was a risk that this effect would be larger than had been assumed in the forecast'. Over 2017 as a whole, growth is projected to be a little weaker than anticipated in May, reflecting a less marked pickup in business investment.

The MPC reckons on two hikes over the next three years, with the first coming in Q3 2018.

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