Bank of England maintains interest rate

“The outlook for global growth has weakened since August”. However, a slowing in the United Kingdom economy and challenges in areas such as China make further reductions in forecast United Kingdom economic growth more likely than upside revisions.

The Bank said inflation was likely to stay below 1 per cent until the second half of 2016, due overwhelmingly to lower costs for energy, food and other imports. It’s a close call, as the overall performance of Chinese equity benchmarks clearly belies both recent market volatility, weakening investor sentiment for emerging markets, and underlying performance among Chinese banks (rising non-performing loans) and weaker than expected trade data.

Although the main headlines are that policy is unchanged – the rate-setting monetary policy committee (MPC) voted 8-1 to keep interest rates where they are – the pound is getting hammered against the United States dollar.

‘There remain downside risks to this outlook, including that of a more abrupt slowdown in emerging economies’.

The pound dropped sharply on publication of the inflation report, along with the minutes of its latest interest rates decision.

Now, normally one might construe this as a slightly hawkish sign (eg that markets’ expectations for rates increases were too cautious).

Carney’s assessment of the worldwide outlook was less sanguine than Yellen’s.

With the inflation report mentioning “sterling” 88 times, there is no doubt the appreciating pound is still a concern for the central bank.

NIESR said rates may rise as early as February, but admitted there was an “increased probability” of a move in the second quarter. Prior to the BOE decision, contracts signaled an increase in November next year.

“Such guidance, however, was an expectation and not a promise: the path that Bank Rate would actually follow over the next few years would depend on economic circumstances”. Most of the risks emanate from overseas.

“Beyond that, the dampening influence of sterling’s past appreciation on inflation is expected to be persistent, diminishing only slowly over the MPC’s forecast period”, the bank said.

Economic forecasters at the National Institute of Economic and Social Research (NIESR) believe the third quarter softening in United Kingdom growth was “temporary” and predicts a rebound in the final three months of 2015.

The MPC has not changed the base rate since 2009.

The yield curve figures used by the Bank of England in its Inflation Report related to the 15-day average up to 28 October.

Darren Ruane, Head of Fixed Income at Investec Wealth & Investment, ‘Today’s Bank of England interest rate announcement was more dovish than markets were expecting.

But most members did not feel inflationary pressures were strong enough. Then a slump in global oil prices pushed British inflation below zero and took a rate hike back off the table. However, he said in the press conference that officials didn’t discuss a cut in the key rate. The committee lowered its central forecast for CPI inflation over the next eighteen months.

It wasn’t clear whether the Bank might stop re-investing (and buying new bonds), but they have now made clear that they will continue to re-invest until they decide to actively unwind QE and sell off those bonds.