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Bank of England votes to hold rates,cut growth forecasts

06 August 2017, 01:37 | Melanie Burgess

Sterling hits 10 month high

BoE 'Super Thursday' looms as sterling hits 10-month high of $1.32

United Kingdom interest rates may have to go up by more than the market expects in the future, Bank of England deputy governor Ben Broadbent has told the BBC. He also pointed out that interest rates were lower now than they were then. "Consequently the task of determining just what effect Brexit had on the United Kingdom economy will mostly fall on the shoulders of tomorrow's historians, rather than today's economists".

The MPC voted 6-2, with the committee one member short, for leaving interest rates unchanged, a less interventionist stance than the 5-3 vote at the June meeting.

And it expects GDP growth to fall back to 1.6 percent next year, down slightly on the previous expectation of 1.7-percent expansion.

Britain's central bank has cut it forecasts for the United Kingdom economy, saying it expects growth to remain "sluggish" over Brexit uncertainty.

CPI inflation was 2.6 percent in June, having risen from 0.5 percent in May a year ago following the fall in sterling against other currencies.

At its simplest level, the policy dilemma facing Britain's central bank is that it must balance surging inflation brought on by the weakened pound since the referendum with the slowdown in the economy, dwindling consumer spending, and declining inward investment.

The cost of debt and borrowing is set to rise faster than markets are now expecting, Ben Broadbent said.

Following the bank's announcement, sterling dropped nearly 1 per cent against the United States dollar to $1.31.

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But the Bank appeared to suggest that households and businesses should not expect borrowing costs to stay at their record low for much longer.

Governor of the Bank of England Mark Carney said that the consequences of uncertainties regarding Brexit are becoming apparent as lacking clarity of future relations with the European Union is having impact on some companies' decisions to enter new markets or make investments.

He said the objective of the MPC was not "the path of interest rates but the stability of inflation in the medium term and subject to that the stability of the economy".

On the other hand, if there are still three policymakers willing to vote for a hike, Sterling will soar and will recover against the Euro for the rest of the week.

While the bank voted - at six votes to two - to keep interest rates at 0.25pc (see the leader in this week's issue of The Spectator for why this isn't such a great idea), its Inflation Report did bear better-than-expected news.

Preliminary report from the Ministry of Health, Labor and Welfare showed that Japan's total labor cash earnings decreased for the first time in thirteen months in June, defying economists' forecast for a further rise.

The BoE lowered by only a fraction its forecasts for inflation which it now saw at just under 2.6 per cent in a year's time after peaking at around 3 per cent in October.

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