Bank of England pauses hikes, awaiting more clarity

The Bank of England’s (BoE) Monetary Policy Committee (MPC) decided to keep interest rates on hold at 0.50%, despite strong signals in recent months that the committee was ready to tighten monetary policy in May.

A much weaker reading of economic growth for the first quarter of the year prompted the BoE to delay the hike, and as Governor Mark Carney explained during his press conference, wait for more clarity over the state of the economy.

The UK, along with much of Northern Europe, was severely disrupted by unusually heavy snowfall. Transportation, construction, and the general movement of people came to a halt in late February and early March.

Carney stated that the BoE believes that much of the weakness in data was probably only temporary, and so the fundamental analysis of the economy had not changed. He explained that it was prudent to wait for more clarity from economic data, just in case there was a more fundamental slowdown in activity. However, assuming that growth rebounds, interest rates are likely to continue to rise. It is worth mentioning that two of the nine members of the MPC voted for a hike today.

We continue to expect a November hike

Regular followers of the Schroders forecast will be aware that we disagreed with the market that interest rates would rise in May. Given the large amount of uncertainty caused by Brexit, it makes sense to wait for greater clarity from the Brexit negotiations. While progress appears to have been made, we remind readers that the entire deal has to be agreed in full before any aspect is secured.

This means waiting until the autumn and is why we forecast the next hike to come in November. It took a little while, but the market now agrees with our view.

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