London: The Bank of England moved closer to raising interest rates as early as May after keeping the benchmark unchanged on Thursday.
The Monetary Policy Committee voted 7-2 to hold the rate at 0.5 per cent. All 62 economists in a Bloomberg survey predicted no change. Policymakers Ian McCafferty and Michael Saunders wanted an immediate increase, arguing that slack in the economy has been used up and wage growth is accelerating.
The pound jumped to an intraday high against the dollar and the strongest since June against the euro. It then pared gains to trade little changed at $1.4141 at 12:56pm. London time. Market pricing of swaps curves implied an 86 per cent chance of a hike in May, similar to before the decision.
“The best collective judgement of the MPC remained that, given the prospect of excess demand over the forecast period, an ongoing tightening of monetary policy over the forecast period would be appropriate,” the minutes of the March meeting said. “All members agreed that any future increases in bank rate were likely to be at a gradual pace and to a limited extent.”
UK data this week has showed the inflation rate slipped to 2.7 per cent in February as the effect of the pound’s Brexit- referendum drop faded, though signs of domestically generated price growth are mounting. Wages are picking up, suggesting consumer spending may strengthen.
The BOE reiterated that UK decision to leave the European Union is the most significant influence on the outlook. The economy has evolved in line with its most recent forecasts published in February, it said.
Those predictions show that excess demand will emerge by 2020 and that, while inflation will slow, it won’t return to the 2 per cent target for the next three years. It will update those forecasts in May.
First-quarter growth was probably similar to the fourth quarter’s 0.4 per cent, though snow may have slowed the expansion to 0.3 per cent, the BOE said.
The bank warned that an increase in protectionism could have a “significant negative impact” on global growth and would put upward pressure on inflation. US. President Donald Trump’s plans to impose tariffs have sparked concern that a trade war may ensue.
The BOE’s decision comes a day after the US Federal Reserve, under new Chairman Jerome Powell, raised interest rates for the sixth time since 2015. Closer to home, the European Central Bank is considering whether to bring a halt to its bond-buying program this year, putting it on track to start raising rates in 2019.