Skip to main content

European Business Bank of England to hold rates after surprise downturn in economic data

Mark Carney, Governor of the Bank of England, addresses the media during the quarterly Inflation Report press conference in London, Thursday, May 10, 2018.

Frank Augstein/The Associated Press

The Bank of England held interest rates steady on Thursday and said it wanted to be sure the British economy was recovering from a slow start to the year before it raised borrowing costs again.

In sharp contrast to overwhelming expectations a few weeks ago that they would raise rates, BoE policy-makers voted 7-2 to keep them at 0.5 per cent.

That was in line with forecasts from economists polled by Reuters in the past week.

Story continues below advertisement

The BoE trimmed its inflation forecasts and cut its growth outlook, but Governor Mark Carney said he expected the economy to recover speed, despite signs of more cautious consumers.

Over all, he said, the BoE was sticking to its message that rates would probably need to rise – for only the second time in more than a decade – once that recovery was clear.

“What’s the sensible thing to do? Do you act now or do you wait to see evidence that that momentum is reasserting [itself],” Mr. Carney told reporters when asked about signals from the BoE earlier this year that a rate hike was approaching.

“The judgment of the majority of the committee is you wait to see for some evidence of that reasserting.”

Investors pushed back their bets on when rates would rise, and sterling slid close to a four-month low against the U.S. dollar.

Rate futures showed less than a 50-per-cent chance of a hike in August, the next time the BoE updates its forecasts.

Mr. Carney later told BBC television that interest rates were likely to rise by the end of this year.

Story continues below advertisement

Britain’s economy grew more slowly than most of its peers last year, after a Brexit-driven jump in inflation hit consumer spending power and some businesses delayed long-term investment.

Growth slowed even more sharply in early 2018 because of a mix of unusually icy weather and headwinds from Britain’s impending European Union exit.

Recent data “had been consistent with a temporary soft patch,” most of the BoE’s rate-setters said. But “there was value in seeing how the data unfolded over the coming months,” they added.

Despite weak growth, the BoE sees the need for rate hikes because it thinks the economy could overheat from weak long-term productivity and lower immigration driven by Brexit.

Mr. Carney said in February that rates might go up sooner than the BoE had previously suggested, and was asked by a reporter on Thursday about the description of him as an “unreliable boyfriend” – first used by a British lawmaker because of his previous signals about when rates might rise, which misfired.

“The only people who throw that term at me are in this room,” Mr. Carney told the news conference.

Story continues below advertisement

However, JP Morgan economist Allan Monks said the BoE had sent a “muddled message” about its intentions.

James Smith at ING said the approach of crunch negotiations about Britain’s post-Brexit trade deal with the European Union could make it hard for the BoE to raise rates later this year.

Policy-makers Ian McCafferty and Michael Saunders, who again voted for a rate increase, agreed the weak growth so far this year reflected “temporary or erratic factors,” but said delaying a rate hike risked more abrupt tightening later on.

The BoE said weaker inflation was the result of a faster fading of the impact of sterling’s plunge on import prices, and that domestic inflation pressures continued to rise.

Inflation was seen dropping to 2.1 per cent in a year’s time, and returning to target a year later, but only if interest rates rise by 25 basis points about three times over three years, as markets expect.

The BoE said the economy would grow by 1.4 per cent this year, down from the 1.8 per cent it predicted in February, with slowing consumer lending and a sluggish housing market creating greater-than-usual uncertainty about consumer demand.

Story continues below advertisement

For 2019 and 2020, it predicted growth of 1.7 per cent, down from 1.8 per cent in its February forecasts.

Reuters

Report an error
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter