Poor weather puts a dampener on Bank of England rate hike as policymakers adopt ‘wait and see’ approach for economic growth
The Bank of England has voted to keep interest rates steady once again at 0.5 per cent, shunting back a decision to hike rates after a slew of weak economic data.
Though the Bank’s Monetary Policy Committee (MPC) said that the lower-than-expected economic growth in the first quarter was likely to be a temporary blip, the majority of its nine members preferred to wait and see how future growth would pan out.
The more hawkish tone struck at the MPC’s last meeting in March also appeared to have faded, as the line that monetary policy should tighten “somewhat earlier and to a greater extent” gave way to a “gently rising [interest rate] path over the next three years”.
Despite this, hawks Ian McCafferty and Michael Saunders again said that a strong labour market and rising pay justified an immediate hike.
The consensus came as no surprise to the City, whose expectations of an interest rate hike had diminished rapidly since mid-April from almost certainly banking on a raise in mid-March.
Most of the first quarter economic weakness, according to the MPC, was down to poor weather, which affects construction projects and high street footfall, a potential understatement of growth in the preliminary estimates and a possible softening in demand.
“Partly reflecting some recovery from weather-related disruption, the MPC expected stronger growth, of around 0.4 per cent, in Q2,” the Bank’s minutes stated.
Yet the Bank has still lowered its economic growth forecasts for the year, from 1.8 per cent to 1.4 per cent.
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Inflation
Inflation is likely to start falling faster than previously expected in the short term, the Bank noted, since the MPC judged that sterling’s depreciation since the Brexit vote would have a lesser upwards effect on import prices.
However in order for inflation to get back to the government’s target of two per cent, the MPC stuck to its previous recommendation that three interest rate hikes of 0.25 per cent each would be implemented over the next three years, though these need not be imminent.
“The costs to waiting for additional information were likely to be modest, given the need for only limited tightening over the forecast period to return inflation sustainably to the target,” the MPC minutes said.
Despite the weak economic data in the first quarter, where growth levelled out at 0.1 per cent according to preliminary estimates as opposed to expectations of 0.4 per cent, the Bank of England still said that limited slack in the economy would lead to a “small margin” of excess demand by 2020, which would feed into higher pay growth and domestic cost pressures to help inflation settle at the two per cent target.
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