Thursday 15 December 2016 12:00 pm

It's unanimous: Bank of England keeps interest rates on hold at 0.25 per cent

The Bank of England's monetary policy committee (MPC) has unanimously voted to hold interest rates at 0.25 per cent.

However, the MPC warned a slowdown in growth was still likely following the Brexit vote, although it added inflation will not rise as much as it had forecast. 

In minutes of its December meeting, it added there were "limits" to the extent it will tolerate inflation above its target of two per cent, and said it could respond "in either direction" to changes to economic outlook.

And members said the pound's rally "by itself" pointed to less of an inflation overshoot than expected – which caused sterling to fall as much as 0.8 per cent against the dollar, to $1.2459.

"The six per cent rise in sterling since the November meeting means the MPC now expects slightly lower inflation than before, but still forecasts a clear overshoot of the target next year," said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

"But growth is expected to slow and the MPC's base case remains that higher inflation will not become embedded into wages and inflation expectations – some measures of which have risen, they noted – so the Bank can continue to look through the inflation spike. We think Bank Rate will be on hold throughout 2017."

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Things looking up?

The Bank has previously warned the UK was likely to see "little growth in GDP in the second half of the year" as the economy ground to a halt following the Brexit vote, and today reiterated that, saying it sees GDP growth of 0.4 per cent in the fourth quarter. 

However, figures showing output in services, manufacturing and construction, the three main sectors of the UK's economy, have suggested GDP growth in the fourth quarter is likely to be higher than the Bank of England expects.

The pound was down in the minutes leading up to the decision, falling as much as 0.62 per cent against the dollar, to $1.2486.

Figures published by Markit earlier this month showed in November, the dominant services sector was fuelled by the sharpest build-up of outstanding work since July last year. 

This week official figures showed inflation hit a two-year high in October, suggesting the weak pound is taking its toll – while employment levels dipped slightly

"The British economy has kept up its positive momentum into the fourth quarter according to survey data, though hard data has been more mixed," said Jasper Lawler, senior markets analyst at London Capital Group. 

"Stagflationary tendencies will be a head-scratcher for BOE policy-makers. The result is probably a continuation of the new ‘neutral stance’ through the first half of 2017. Five pound notes have more meat than the Bank of England’s plan for interest rates."

US divergence

Today's move (or lack thereof) represents another divergence from the US Federal Reserve's strategy. Last night the Fed raised the target range for its federal funds rate to 0.5 to 0.75 per cent, its second hike of the year. 

Meanwhile, in August the Bank of England cut interest rates to 0.25 per cent after seven years of 0.5 per cent and extended its quantitative easing programme, off the back of fears over how the UK economy will fare following the Brexit vote. Analysts suggested the MPC will have been particularly cautious, given the proximity of today's announcement to last night's Fed vote.