Bank of England leave interest rates frozen at 0.5%

“Clear communication from the Bank of England will be important to help businesses and households plan for the future, and minimise uncertainty about changes in monetary policy”. BoE governor Mark Carney said: “The overall economic climate in the United Kingdom looks little changed thus far”.

The move follows experts widely predicting that base rate would rise this May.

The BoE also left the Bank Rate unchanged at 0.5 percent, with only two out of nine rate-setting Monetary Policy Committee (MPC) members voted for a rise, with the two minority-view members being external appointees Ian McCafferty and Michael Saunders, with the BoE’s six staff all voting for no rise.

“With rates still rooted at emergency levels, this is one of the challenges faced by the Bank and how it chooses to deal with this will be key to the success of the United Kingdom economy in coming years”. Conversely, dovish comments and economic pessimism would send it lower. This may be prudent but it risks the Bank being short of firepower come the next downturn.

This seems hard to square with the recent weakness in the pound when set against a 60% rise in Brent crude prices since last summer. “Survey indicators, and evidence from the Bank’s (regional) agents, suggested that growth had been somewhat stronger in the first quarter than implied by the preliminary estimate”.

The governor was speaking after officials kept the key interest rate on hold at 0.5 per cent after a first-quarter slump, and said inflation will weaken faster than previously anticipated. They may also be keen to maintain expectations of an interest hike to avoid weakening the Pound and giving inflation a boost. In individual movers, ITV (LON:ITV) has been one of today’s most prominent FTSE 100 risers after updating investors on its first-quarter performance.

The reputation of the Bank of England’s May policy decision has very much preceded the event itself.

There was bad news, however, for 2018, with the bank saying that it expects growth of just 1.4% in the United Kingdom this year, compared to 1.8% at its previous forecast. Moreover, the purchasing managers’ index for the United Kingdom manufacturing sector, a forward-looking indicator widely watched in the markets, fell to a 17-month low in May. Disappointing inflation, growth, wages and PMI data means that financial markets went from pricing in a near certainty of a hike to placing less than a 15% possibility an increase this month.

For the pound, this is crucial. It is now positive on the year, up 0.3 per cent from its starting level on January 1.

Against the Japanese yen, the pound was down by 0.53% to 147.8840. Prices initially ran into short term resistance at 1,320, but target resistance is near the April highs at 1,365.

“Of course, rates will nearly certainly creep up in time but when they do, we shouldn’t fear this as most home owners will be on fixed rates so will experience little immediate impact”.