The Monetary Policy Committee (MPC) of the Bank of England held a meeting last March 15 and has concluded to hold the present interest rates at 0.25%, while maintaining its original target to attain inflation rates at 2% and voted to keep the present government bond buying ceiling rate at £435 billion.
During the meeting, the MPC voted 8-1 to retain the current monetary policy of the central bank at least before the UK enters the process of triggering Article 50 to exit the European Union. According to the central bank, they are still bracing for possible bigger impact and slowdown of economic growth following its divorce from the EU, even though the nation has exhibited better-than-expected economic performance following the Brexit vote.
The MPC based their votes on whether to raise bank rates or not on the possible outcome of the UK’s referendum on its EU member. “The appropriate path for monetary policy depends on the evolution of demand, potential supply, the exchange rate, and therefore inflation,” BoE stated.
Although it is common for central banks to raise interest rates when inflation rises, the BoE decided to hold its rates since they are aiming for an inflation rate of 2%, which could potentially hurt the British pound in the long run. Inflation rates in January were recorded at 1.8%, while the MPC expects it to increase to around its 2% target over the course of a few months and 2.75% in early 2018.
According to MPC, the interest rates for the British pound both long and short term has fallen notably since the central bank’s last meeting, its downward movement mainly attributed to the current economic events and data in the UK, including retail sales data and labour market data.
“Official retail sales have weakened notably, consistent with this expectation, although other indicators of consumer demand such as consumer confidence have been steadier,” the central bank added.
The continuing weaker wage growth and retail sales are signs that Brexit effects are starting to show its impact to the nation, leaving the central bank with a challenging decision. Still, BoE decided to maintain a neutral approach towards its interest rates, maintaining current rates, but still hinting at a possible hike in the future.
After stating the current economic conditions the UK is going through and possible direction its state could go after the referendum, MPC states that monetary policy could still not prevent “either the real adjustment that is necessary as the UK moves towards its new international trading arrangement or the weaker real income growth that is likely to accompany it over the next few years.” The central bank only takes measures that it believes to lessen the drastic changes of a new trade relations setup.
Following a BoE’s monetary policy, the British pound briefly regained ground against the greenback, due to surprise vote among one of MPC’s members who called for an immediate rate increase, as well as a less hawkish Federal Reserve.
Sterling rallied to 2-week highs after the Bank of England’s retained bank rates on Thursday, reaching the day’s high of 1.2376 against the greenback. At present, sterling traded higher at 1.2391, 0.28% 1011 GMT higher from the previous session and was up by 1.5% for the week.
The pound briefly soared as the central bank hinted at a possible rate hike sometime soon and one hawkish vote from one of its members.
BoE Vote Split
During the MPC meeting, 8 of its members voted for rates to be held for the time being, while 1 member, Kristen Forbes, surprisingly voted for an immediate rate hike by at least 25 basis points, shocking most markets, as it was previously anticipated that the MPC would give a unanimous vote on retaining rates.
Forbes is currently an external member of the central bank’s Monetary Policy Committee, although her vote for a rate hike signaled possible hawkish outlook in the future, the fact that she will be leaving her position and the central bank altogether by the end of June lessens the impact of her vote. Still, her unexpected rate hike vote took the markets by surprise.
This was the first time since July last year for the MPC to experience a vote split over bank rates.
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