Steady as She Goes: BoE Leaves Rates Unchanged

The Bank of England’s (BoE) Monetary Policy Committee (MPC) today voted unanimously to maintain Bank Rate at 0.25%. 

The Committee also decided to continue with the programme of sterling non-financial investment-grade corporate bond purchases totalling up to £10 billion, financed by the issuance of central bank reserves. 

Additionally, it will continue with the programme of £60 billion of UK government bond purchases to take the total stock of these purchases to £435 billion, financed by the issuance of central bank reserves.

Overall, the decision to maintain rates at the current level appears to have elicited little surprise from market participants.

“As widely expected, the Bank of England voted unanimously to keep interest rates unchanged and to make no further tweaks to its QE programme this month. Having repositioned its policy stance to neutral last month, there was little prospect of any immediate change,” says Adam Chester, head of economics at Lloyds Bank Commercial Banking.

Similarly, Tim Graf, head of macro strategy – Europe at State Street Global Markets, comments: “Steady as she goes from the Bank of England. We think the next few meetings could turn out as today’s did, with little action until firms and consumers respond to the actual triggering of Article 50 and the beginning of the Brexit process. 

“And that’s even with inflation creeping higher, as the MPC has already indicated they will look through near-term upside price pressures. February’s quarterly inflation report is likely the next major event for BOE watchers; unfortunately, it’s still just under two months away.”

Both Chester and Shilen Shah, bond strategist at Investec Wealth & Investment, note that the Committee said that the recent recovery of GBP has implications for inflation in 2017, and add that the BoE appears to be waiting to ascertain the impact of the Brexit negotiations before committing to any significant changes in policy.

“As expected, the BoE left UK base rates unchanged with 9-0 vote. The committee did however note that the recent recovery in Sterling’s value is likely to mean that 2017’s inflation overshoot is likely to be somewhat smaller than what was indicated in the November inflation report. Overall, it does look like the BoE is in a holding pattern as it tries to understand what the government’s Brexit strategy is and its impact on the UK economy.”

“In contrast to the BoE, yesterday’s Fed Fund increase by the FOMC is a clear indicator that US monetary policy is shifting up a gear. The FOMC also nudged up its guidance for 2017, with the central bank now looking for three rate hikes in 2017. Uncertainty over the new administration’s fiscal policy, however, remains a key area of uncertainty, with a large fiscal expansion likely to force the Fed to accelerate interest rate normalisation,” says Shah.

Meanwhile, Chester says: “In the accompanying statement, the Bank reiterated that the squeeze in real household pay from rising inflation and heightened uncertainty would slow the economy next year. The overshoot in inflation, however, may not be quite as large as previously expected given the recent recovery in the pound.

“Overall, today’s decision does nothing to alter the policy outlook. The Bank of England is likely to keep interest rates on hold through next year while it awaits to see whether the risks to economic growth and inflation crystallise. The pound and bond yields have eased slightly in the wake of the announcement.”



Galen Stops

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