February 25, 2018

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Bank of England: Bank Rate Maintained At 0.50

10 February 2018

Inflation reached a peak of 3,2 percent in November, falling to 3 percent in December, well above the 2 percent policy objective set by most developed economies.

"Were the economy to evolve broadly in line with.projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater degree over the forecast period than anticipated [in] November", the minutes of the MPC meeting said. The same day, the Reserve Bank of India kept its policy rate unchanged, to "carefully" nurture economic growth.

The key takeaway from the Bank of England's information dump on Thursday, confirmed by Governor Mark Carney soon afterwards, was that policymakers' tolerance of inflation well above target has ended.

The Bank of England (BOE) has signaled the need for interest rate rises earlier and potentially larger than previously predicted, preparing markets for impending higher borrowing costs.

The projection now is that the next interest rate rise could be in May. In such exceptional circumstances, the MPC's remit specifies that the Committee must balance any trade-off between the speed at which it intends to return inflation sustainably to the target and the support that monetary policy provides to jobs and activity.

The BoE expects the world economy to grow by 4 percent in 2018, one of its best performances in years.

Monetary policymakers unanimously voted to hold the base rate at 0.5% in February but used the latest inflation report and update to warn the next hike will come earlier than thought past year, if the economy continues on its current path. "Future decisions on interest rates will therefore depend heavily on progress in negotiations with the European Union". Additionally, the Bank said business investment rates were still restrained by "Brexit related uncertainties", bringing the weakest investment recovery for over 50 years.

Today's release suggests that the bank is considering a hike in May, the next time it releases an Inflation Report.

Global cues are going to be critical, particularly from the developed economies, because after a subdued economic growth since the meltdown in 2008-09 there are strong headwinds of a turnaround which may push crude oil prices further, that will invariably affect India's economy.

"The guidance is likely to remain data-dependent, with a shift to tighten rates requiring further evidence in a build-up in inflationary pressures", said Radhika Rao, group economist for DBS in Singapore.

Sterling jumped on the announcement, with expectations of more rate hikes bullish for the UK's currency.

The Bank of England's judgement is that while the domestic picture will remain reasonably strong, the economy will also be dragged higher by the strength of the global economic recovery. It has estimated 7.2 per cent growth in the next fiscal.

There are host of other factors including rising commodity costs and higher disposable income by way of increase in salary for a huge number of government employees, leading to spike in inflation.

Bank of England: Bank Rate Maintained At 0.50