Bank of England votes 7-2 to hold Bank Rate at 0.5%

The Bank of England's Monetary Policy Committee have voted by a majority of 7-2 to maintain Bank Rate at 0.5%.

Related topics:  Finance News
Rozi Jones
22nd March 2018
Bank of England BoE
" An ongoing tightening of monetary policy over the forecast period will be appropriate to return inflation sustainably to its target at a more conventional horizon."

Citing reasons, the MPC noted that inflation remained above the 2% target in the second and third years of its central projection.

Inflation is expected to ease further in the short term although to remain above the 2% target.

The Committee says that Brexit remains "the most significant influence on, and source of uncertainty about, the economic outlook".

The MPC says it must balance any significant trade-off between the speed at which it intends to return inflation sustainably to the target and the support that monetary policy provides to jobs and activity.

The steady absorption of slack has "reduced the degree to which it is appropriate for the MPC to accommodate an extended period of inflation above the target", the minutes read.

The Bank's minutes concluded: "As in February, the best collective judgement of the MPC remains that, given the prospect of excess demand over the forecast period, an ongoing tightening of monetary policy over the forecast period will be appropriate to return inflation sustainably to its target at a more conventional horizon."

Ed Monk, associate director for Personal Investing at Fidelity International, said the vote means that borrowers should begin preparing for a rate rise.

Monk said: “The message from the Bank of England to borrowers couldn’t really be clearer: get ready for higher rates now. Two members voted for a rate rise this month and the Bank said nothing to dispel expectations that rates will rise in May.

“The rate rise made in November felt like a straightforward reversal of the emergency post-Brexit cut, but this now feels more like we’re entering a genuine tightening phase at the Bank.

“Inflation has been above target for more than a year but it’s recent stronger wage growth that has prompted Mark Carney and the other MPC members to become more hawkish. They expect wage rises to increase and soon overtake inflation (they already have if you include bonuses). As unlikely as it may seem to struggling UK households, the Bank is worried about an overheating economy.

“If the Bank’s central case proves correct, the good news is that wages should be able to regain some lost ground as the currency-driven inflation that followed the Brexit result eases back and the benefits of a tight labour market at last translate into a pay-rise for workers. The sting in the tail will be higher costs of borrowing for indebted households.

“The MPC breaks up now for a month and returns in May, with the signs pointing to a rate rise. Despite that, the upward trajectory of interest rates is still expected to be gradual. Savers and investors will need to push up the risk spectrum to secure an acceptable yield. With the stock market yielding around 4%, it is likely to be a better source of income than cash or safer fixed income investments for a while yet.”

Frances Haque, Santander UK Chief Economist, commented: “The MPC’s decision is very much as expected, with the consensus view being that the MPC will wait until May at the earliest before making any additional increases.

“The expectation of a rise in the near future is based partly on comments in the February MPC minutes, which stated that assuming the economy develops in line with the Bank of England’s inflation report, monetary policy would need to be tightened “somewhat earlier and by a somewhat greater extent” than previously anticipated in order to return inflation sustainably to the target.

“With this being the last MPC meeting before the May meeting, any speeches MPC members are due to make in the coming weeks will be watched closely for hints over the timing of the next hike. However, it’s clear that any rise will depend on how the economic news develops on inflation and growth.”

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