The central bank’s monetary policy board voted Thursday to freeze the base rate at 1.5 percent.
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Households do not foresee a sudden surge in inflation or economic growth as the number of Britons expecting an interest rate hike in the next twelve months has dropped to its lowest in two years. Commentators from The Times newspaper in the United Kingdom describe the BoE as “piggy in the middle” given the divergence between the Fed and the ECB, whereby the latter cut their deposit rate last week and with the former widely expected to hike rates next week, seeing the U.S. central bank diverge with Europe for the first time since 1994. However, CME Group noted that fed funds futures implied traders priced in an 87 per cent chance of a hike in interest rate next week, up from 83 per cent recorded earlier.
Previously the Bank had sought to force the pound exchange rate complex lower, and push back interest rate expectations, by blaming global developments for remaining cautious.
Following the announcement, Sterling fell slightly against both the dollar and euro.
“There are no reasons to raise United Kingdom interest rates now – however, with the Fed due to raise next week the worry is that the BoE will feel the pressure mount and move quicker than is expected”.
Britain’s central bank surprised investors last month when it released a barrage of economic forecasts that suggested it might leave rates unchanged until early 2017, pushing down the value of sterling.
The US dollar, up until recently, has been rallying hard as markets pre-empted the likelihood of the highly anticipated “rates liftoff” finally coming to fruition.
The outlook for the domestic economy was little changed from the forecasts contained in the Bank’s November Inflation Report, with “robust growth in private domestic spending continuing to counter-balance subdued demand growth overseas”.
What markets are looking for is any signal of how close the Bank is to raising interest rates.
The BoE also voted to keep the Asset Purchase Target unchanged at 375b, also as expected.
Minutes of the meeting show that Ian McCafferty was again the only member to vote for a quarter-point increase in borrowing costs, “given his view that the path of domestic costs was more likely to lead to inflation exceeding the target in the medium term than was embodied in the committee’s collective November projections”.
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“Indeed, the Mpercent does not appear to be in any rush to raise rates”. The longest-serving current member is Martin Weale, who joined in August 2010, more than a year after the last change in rates. We still expect the BoE to start hiking rates in Q3 2016 and this makes us constructive on GBP vs. EUR, JPY, CHF as well as the G10 commodity currencies.
