United Kingdom central bank keeps interest rates low as economy slows

The Pound Sterling (GBP) exchange rate tumbled against the majority of its peers on Thursday as the Bank of England left its monetary policy unchanged in May. However, at the same meeting during which the Bank's MPC voted to hold interest rates steady, they also downgraded their forecast for the year's economic growth from 1.8% to 1.4%.

However, it is likely in part to have reflected adverse weather in late February and early March, according to the committee. Hiring intentions have remained strong and, over the past three months, the unemployment rate has fallen slightly further. Surveys have suggested little rebound last month. For 2019 and 2020, it predicted growth of 1.7 percent, down from 1.8 percent in its February forecasts.

"If the forecasts are right, then expect interest rates to remain lower for longer as United Kingdom growth lags the rest of the world, inflation subsides and Brexit clouds remain".

"It's likely over the course of the next year rates will go up. that's the most likely thing to happen", Mr Carney said in an interview with the BBC, the broadcaster said.

In its May Inflation Report, the BoE revised its projected GDP growth expectations for the second quarter of 2018 down from the February estimate of 1.8% to 1.4%, while predicting inflation will fall to 2.4%, rather than 2.7% as previously forecast.

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In minutes of the MPC meeting, the Bank said: "Weakness in the data for the first quarter had been consistent with a temporary soft patch, with few implications for the current degree of slack or for the outlook for the United Kingdom economy". The BoE said weaker inflation was due to a faster fading of the impact of sterling's plunge on import prices, and that domestic inflation pressures continued to rise.

"An ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target at a conventional horizon", the BOE said. As previously, however, that judgement relies on the economic data evolving broadly in line with the Committee's projections.

The committee meets monthly to discuss whether to cut, raise or leave interest rates unchanged, as well as other measures such as quantitative easing.

ING's base case is for two of the nine MPC members to dissent and call for higher borrowing costs at the decision at noon in London, and for the central bank to downplay soft economic first-quarter growth and signal that a rate increase later this year is still in the cards.

  • Ronnie Bowen