Published: Sat, May 12, 2018
Economy | By

BoE: Mixed messages - Deutsche Bank

BoE: Mixed messages - Deutsche Bank

The Bank of England has backed away from raising interest rates following a sharp slowdown in growth.

Meanwhile the US dollar found its advance slowed yesterday by the publications of the latest US CPI figures.

This is largely down to a recent set of figures that showed that the United Kingdom economy grew by just 0.1% during the first quarter of 2018.

Sterling weakened after the Monetary Policy Committee surprised economists who were expecting a "hawkish hold" on policy, by cutting its forecasts for near-term growth in the United Kingdom economy and for inflation.

The pound, which had been up as much as 0.5 percent before the rate announcement, was down 0.1 percent at $1.3534 as of 2:17 London.

Britain's economy grew more slowly than most of its peers past year, after a Brexit-driven jump in inflation hit consumer spending power and some businesses delayed long-term investment. It said first-quarter growth will probably be revised up to 0.3 percent from the initial estimate of 0.1 percent.

Confirming a glum first quarter for the economy, industrial output barely rose in March, data showed.

The BOE isn't the only central bank to wobble on the exit ramp from the easy money of the past decade, even as the U.S. Federal Reserve sticks to its plan to gradually raise rates.

In February, Carney said rates might need to rise somewhat faster than markets had expected, given the country's long-term productivity problems. "Taking external and domestic influences together, CPI inflation is projected to fall back slightly more quickly than in February, reaching the target in two years".

The decision to keep rates on hold will be welcomed by the 4 million or so households on a "tracker" or variable interest rate mortgage as any rise would increase their monthly repayments, but the 45 million Brits who have savings in the bank will be less happy as the return on their investment will be unchanged.

Money markets now show the probability of an August increase in borrowing costs as only about 50 percent, and a hike by the end of the year - previously fully priced in - at about 87 percent.

However, the BoE may not be comfortable with this scaling-back of interest rate expectations, which has the potential to fuel inflation through a weaker pound and cheaper credit.

He added however that the MPC's answer to the question of whether "weakness [was] due to the weather or the climate" was the former, and that "overall the economic climate looks little changed to the MPC thus far".

"We expect the disappointing first quarter to be portrayed as a temporary lull by the MPC. and therefore expect the lack of a hike to be presented as an expected postponement rather than a cancellation", UBS interest rate strategist John Wraith said.

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