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22 March 2018
 |
| The Bank of England (The Total Investment & Insurance Solutions) |
The Bank of England kept its interest rates unchanged Thursday but
appeared to hint that another rate hike in May was possible as inflation
remains high.
The minutes to the meeting showed that two of the nine members on the
Monetary Policy Committee backed an immediate quarter-point increase in the
bank's main interest rate to 0.75 percent. The other seven, including Governor
Mark Carney, preferred to keep it unchanged at 0.5 percent.
Ian McCafferty and Michael Saunders argued that a "modest
tightening ... could mitigate the risks from a more sustained period of
above-target inflation that might necessitate a more abrupt change in policy
and hence a greater adjustment in growth and employment."
Despite resisting an immediate hike, a majority in the committee is
ready to back another interest rate increase soon, the minutes indicated. In
November, the bank raised rates for the first time in a decade to clamp down on
high inflation even though higher borrowing rates have the potential to weigh
on the economy, which had already slowed in the face of uncertainty related to
the exit from the European Union.
As in February, the minutes showed that the "best collective
judgment" of the rate-setting panel was that "an ongoing tightening
of monetary policy over the forecast period would be appropriate to return
inflation sustainably to its target at a more conventional horizon."
Rate-setters also said future increases were likely to be
"gradual" and "limited."
In financial markets, investors have price in 80 percent of another rate
rise and Thursday's minutes did nothing to alter that view. The recently
resurgent pound remained firm, trading 0.1 percent higher after the rate
decision at $1.4150.
"It now looks increasingly likely we'll see a rise to 0.75 percent
at the bank's May meeting," said Ben Brettell, senior economist at
stockbrokers Hargreaves Lansdown. "Beyond that the outlook is less
clear."
In February, when the bank published its quarterly economic projections,
Carney indicated that a hike in May was likely. Economic figures since then,
according to Thursday's minutes, were "broadly consistent" with those
views.
Official figures this week showed inflation in the year to February fell
— to an annual rate of 2.7 percent — though that's still above the bank's
target of 2 percent. In its February's projections, the Bank of England said it
expects inflation to remain above target for another year or two, supporting
predictions for at least one more rate hike this year.
Meanwhile, wages are rising and that should support spending and
inflation. Britain's vote in June 2016 stoked inflation as the ensuing drop in
the value of the pound raised the price of imported goods. But while that
pound-driven increase in prices is expected to ebb, the Bank of England
believes the pick-up in wages will continue to support inflation.
There was little new insight in the minutes regarding the bank's views
on the impact of Brexit, bar a reference to the fact that the British
government secured the outlines of a transition deal after Brexit day on March
29, 2019. Carney has been one of the more vocal advocates in favor of quickly
agreeing on a transition deal so that businesses can plan ahead.
With the terms of the transition expected to be confirmed Thursday at a
meeting of EU leaders, many economists think there will be few obstacles to the
Bank of England raising rates again in May, when it will also publish its new
quarterly economic projections.
"It is the apparent agreement on a Brexit transition deal that has
sealed a May rate rise," said Professor Peter Urwin of Westminster
Business School.The Total Investment
& Insurance Solutions
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