Bank of England to keep powder dry for now

Bank of England to keep powder dry for now

The Bank of England’s monetary policy setting meeting last week ended, as expected, with no changes to policy.

The key bank rate was left at 0.75%.

The last time the rate was changed was back in August 2018, when it was raised by 25 basis points.

The meeting minutes indicated that the Bank is of the view that UK economic growth appears to be slightly stronger than previously anticipated.

As a result, it is now forecasting UK GDP growth of 0.5% for the first quarter of 2019, compared to 0.2% in the final quarter of last year.

However, this is partly due to UK companies stockbuilding ahead of the original Brexit deadline at the end of March.

It envisages that this boost is temporary in nature and is pencilling in growth of 0.2% for the second quarter of the year.

The Bank of England’s updated economic forecasts for the UK were detailed in its latest quarterly inflation report.

The projections outlined in the report continue to be based on the assumption of a relatively "smooth adjustment" following the UK’s exit from the EU.

There were upward revisions to the GDP forecasts compared to the February edition.

The Bank is now expecting growth of 1.5% this year. This compares to the previous forecast of 1.2%.

Bank of England to keep powder dry for now

Further out, the Bank of England is expecting GDP growth of 1.6% and 2.1% in 2020 and 2021 respectively, both slightly higher than previously expected.

Meanwhile in terms of the inflationary outlook, the British central bank is projecting that inflation, currently at 1.9%, will fall slightly further below its 2% target in the first half of this year.

However, it anticipates inflation, on the back of emerging excess demand and a firming in domestic inflation pressures, will be above its 2% target in two years time and will still be on an upward trajectory three years from now.

Futures contracts indicate that the market is not anticipating any rate hikes this year from the Bank of England.

These contracts suggest that the market is not fully pricing in a rate increase until the end of 2020.

This would take rates up to 1% and the market sees rates remaining at this level over the following two years.

Overall, last week’s set of updates from the Bank of England indicate that Britain's central bank retains a tightening bias. In other words, it wants to increase interest rates.

However, the central bank has been hinting at this for quite some time, but has taken little action.

Given ongoing Brexit uncertainty and the fact that the new Brexit deadline has been pushed out to the end of October, a rate hike this year would seem unlikely.

However, Bank of England governor Mark Carney remarked that current market expectations for the future path of official interest rates are too modest if the Bank is to achieve its inflation objective.

As a result, in the event of a soft Brexit, the Bank of England could tighten policy considerably earlier, possibly in the first quarter of 2020 and to a greater extent than markets currently expect in the period 2020-2021.

The Bank of England, though, continues to emphasise that interest rates are still likely to stay relatively low.

John Fahey is senior economist at AIB

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