Interest rates on hold as Bank cuts growth outlook

Interest rates on hold as Bank cuts growth outlook

The Bank of England has kept interest rates on hold at 0.5% and cut its growth forecast for this year.

The Bank expects growth of 1.4% in 2018, down from its previous forecast of 1.8% made in February.

However, the Bank says that cut is almost entirely due to the disruption to the economy caused by the bad weather that hit the UK in March.

It expects a rebound in the coming months and notes that unemployment remains low.

As recently as February economists were expecting the Bank to raise interest rates this month.

That view changed after figures released last month showed that the economy grew by just 0.1% in the first three months of the year.

Interest rates on hold as Bank cuts growth outlook

The slowdown was caused by the Beast from the East – severe weather which shut down construction sites, kept shoppers at home and caused transport chaos.

However, the Bank described that as a “temporary soft patch” with “few implications” for the outlook for the economy.

The financial markets are now indicating there will be an interest rate increase towards the end of the year followed by another in 2019, and a further one in 2020.

  • Live reaction to the Bank’s decision
  • What would a rate rise mean for me?
  • UK economy in weakest growth since 2012
  • UK inflation falls to lowest in a year

Movements in the Bank’s official rates can have big effects on UK households. A rise would mean that about four million households with variable or tracker rate mortgages would see an increase in their monthly payments, while an increase would benefit the nation’s 45 million savers.

Bank of England governor Mark Carney sets interest rates with a team of eight other experts that form the Monetary Policy Committee (MPC).

At the latest meeting, seven members voted to keep interest rates on hold and two, Ian McCafferty and Michael Saunders, voted for an increase.

Interest rates on hold as Bank cuts growth outlook

Analysis: Kamal Ahmed, BBC economics editor

Interest rates on hold as Bank cuts growth outlook

Is Mr Carney revealing once again his “unreliable boyfriend” tendencies, promising that interest rate rises are just around the corner, only to pull back?

He might suggest that he and the other eight members of the MPC are less the unreliable partners, more the “sensitive” listeners.

Sensitive to changes in the data which effect a decision based on fine margins and delicate judgements.

It was John Maynard Keynes who said that when the facts changed, so, sir, did he.

Today the Bank has changed tone. Let’s wait and see, it is saying.

Let’s wait and see how the economy develops until we give any firm guidance on the path of interest rates beyond the Bank’s often used formulation of some limited rises “over the forecast period” of the next three years.

Yes, they will rise at some point. But the chances of that happening sooner rather than later has receded.

Read Kamal’s blog in full

Interest rates on hold as Bank cuts growth outlook

Waiting game

The minutes from the meeting show the MPC wants to wait and see how the economy performs over the coming months.

While they expect it to recover from a weak start to the year, there is a risk that the slowdown could be more persistent.

The course of interest rates depends on inflation falling in line with the Bank’s expectations.

In March, inflation was running at an annual rate of 2.5%, which is above the Bank’s target of 2%.

Interest rates on hold as Bank cuts growth outlook
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What exactly is the Bank of England interest rate?

But in its most recent Quarterly Inflation Report, the Bank blames above-target inflation on higher prices of imported goods caused by a weaker pound.

The Bank expects that effect to fade over the coming years, bringing inflation back to 2% by early 2021.

It also forecast that the unemployment rate would fall further, to 4% by 2020, the Bank’s lowest forecast since the financial crisis.

Source: BBC News

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