The Bank of England monetary policy announcement and press conference went broadly as expected today, with the central bank holding off on raising rates while maintaining that they will rise gradually over the forecast period.
The central bank had previously strongly hinted that base rate would rise today – taking it above 0.5% for the first time since 2009 – but as the economic data took a turn for the worse in February and March, the tone changed. While the central bank maintains that it believes the data deterioration is temporary, it chose to wait for evidence of this before acting causing many to question the reliability of the central bank forecasts and its forward guidance.
Governor Mark Carney was keen to stress in the press conference that, despite today’s decision, policy makers are confident that domestic inflationary pressures are building gradually and appeared relatively comfortable with the expectation of roughly two rate hikes over the next 18 months and three over the next three years. This is unchanged from February and further reiterates the bank’s belief that the timing of the next hike isn’t as important as is suggested.
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While the pound remained volatile throughout the press conference, the bulk of the decline after the release – more than 0.5% against the dollar – came in response to the new economic projections which forecast lower growth and inflation over the next three years. Carney may have expressed confidence in the outlook but the forecasts were less convincing. Still, markets continue to price in a rate hike this year – most likely in November – which assuming Brexit negotiations progress as planned, will be far more convenient for the central bank.