By CentralBankNews.info
The Bank of England (BOE) raised its benchmark Bank Rate by another 25 basis points to 0.75 percent, as expected, and confirmed its recent guidance that “an ongoing tightening of monetary policy over the forecasts period would be appropriate to return inflation sustainably to the 2% target at a conventional horizon” if the economy continues to develop as expected.
It is the second rate hike by the U.K. central bank since August 2016, when the rate was slashed in the wake of the decision to withdraw from the European Union (EU), known as Brexit.
The first rate hike after Brexit and the Global Financial Crises took place in November 2017.
All 9 members of the BOE’s monetary policy committee (MPC) voted to raise the rate and also maintain the stock of UK government and corporate bonds that total 445 billion pounds. At the last meeting in June only 3 members had voted to raise the rate.
Despite the guidance that monetary policy will continue to be tightened, the uncertainty over Britain’s future outside the EU after March 2019 weighs heavily on economic prospects.
“The MPC continues to recognize that the economic outlook could be influenced significantly by the response of households, businesses and financial markets related to the process of EU withdrawal,” the BOE said.
On top of this uncertainty, the MPC members found that the pace of global growth was a little softer and less synchronized than previously expected, with “tentative signs that actual and protectionist policies were starting to have an adverse impact.”
The BOE had been set to raise its rate in May but held off as it became clear the UK economy slowed sharply in the first quarter, a slowdown also seen in the euro area and China.
But the BOE said economic data confirm “the dip in output in the first quarter was temporary, with momentum recovering in the second quarter” as the UK labour market continues to tighten amid a very limited degree of slack that results in excess demand by late 2019, feeding into higher domestic costs and thus inflation.
In an update to its economic projections, the BOE raised its forecast for inflation and economic growth while the outlook for the Bank Rate, which is based on forward market interest rates, was lowered slightly but still points to the next rate hike in the second half of 2019.
The BOE expects inflation to average 2.5 percent in the fourth quarter of this year, up from May’s forecast of 2.4 percent, and 2.2 percent in the fourth quarter of 2019, up from 2.1 percent. By the final quarter of 2020, inflation is seen at 2.1 percent, up from 2.0 percent and then 2.0 percent in 2021.
The UK economy is seen growing an annual 1.5 percent in the fourth quarter, up from 1.4 percent seen in May, then 1.8 percent in the 2019 fourth quarter, up from 1.7 percent, and then an unchanged 1.7 percent in the final quarters of 2020 and 2021.
The path of the Bank Rate, as implied by forward rates in financial markets, rises to 0.9 percent by the third quarter and fourth quarters of 2019 from 0.7 percent in the fourth quarter of this year, signaling that markets don’t expect further hikes this year and only one more hike next year.
The UK economy grew by only 0.2 percent in the first quarter of this year for annual growth of 1.2 percent, down from 1.3 percent in the previous quarter. But the BOE expects growth of a quarterly 0.4 percent in the second quarter, supported to solid global growth.
Inflation was steady at 2.4 percent in June from April and May, reflecting past depreciation of the pound and higher energy prices.
Despite the rate rise, the pound continued its slide since mid-April and was trading at just over 1.30 to the U.S. dollar, down 3.8 percent this year and down 10 percent since 1.43 on April 17.
The Bank of England released the following statement:
