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Bank Rate held at 0.25% despite rising inflation

by: Paloma Kubiak
  • 11/05/2017
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The Bank of England’s Monetary Policy Committee voted by a majority of 7-1 to maintain the Bank Rate at the historic low of 0.25%.

The committee also voted unanimously to continue with the programmes of sterling non-financial investment-grade corporate bond purchases, totalling £10bn, and to maintain the stock of UK government bond purchases at £435bn.

Its decision came as consumer-facing sectors faced a slowdown in the first quarter, partly reflected by the impact of sterling’s depreciation – 16% below its November 2015 peak – although it did appreciate 2.5% between February and May this year.

The depreciation of sterling has also fed through to consumer prices, but the MPC noted the impact was partially offset by continued subdued growth in domestic costs, with wage growth being notably weaker than expected.

However, it said that wage growth is expected to “recover significantly” but as part of its quarterly inflation report also published today, it expects inflation to rise further above the 2% target (currently 2.3%, expected to reach 2.7% in June), again citing the fall in sterling for the overshoot.

Ben Brettell, senior economist at Hargreaves Lansdown, said: “The economy is battling some significant headwinds at present, as higher inflation puts the squeeze on consumers’ real incomes ahead of June’s general election and the start of Brexit negotiations. The economy has surprised on the upside since last summer’s referendum, powered by a resilient consumer, but it looks like households are now starting to feel the pinch from the current bout of inflation. The Bank expects inflation to peak a little below 3% in the fourth quarter.

“However, it also looks likely that a pickup in exports and business investment could help offset any weakness in the consumer sector.

“Unsurprisingly interest rates were left unchanged, with just Kristin Forbes voting for a 0.25% rise to 0.5%. However, the Bank also warned that rates may have to rise sooner and faster than the market currently expects. Wage growth, which has been notably lacklustre of late, is seen picking up sharply next year. It might not take much positive economic data to persuade further MPC members to join Forbes and vote to hike rates, though it should be noted that she is due to leave the MPC at the end of June.”

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