The Bank of England (BoE) has held interest rates at 0.25 percent following its Monetary Policy Committee (MPC) meeting today. However, one member voted to increase rates, which has caused quite a stir in the markets.
This split in sentiment has been taken by some as an echo of the last time opinion was divided about interest rates in July 2016, which eventually led to a loosening of monetary policy the following month. There were hints in the meeting rhetoric that a rate increase was on the horizon, as rising inflation reared its head once more:
“…with inflation rising sharply, and only mixed evidence on slowing activity domestically, some members noted that it would take relatively little further upside news on the prospects for activity or inflation for them to consider that a more immediate reduction in policy support might be warranted.”
This apparent change in thinking has taken the markets by surprise, as nobody felt that an interest rate hike was so close in the central bank’s minds. The meeting minutes provided a welcome boost for Sterling, which bounced up against both its major currency pairings, the US Dollar and Euro.
GBP jumps against EUR
GBP enjoys boost against USD
David Johnson, Director at currency brokerage, Halo Financial, comments: “Forecasts for the UK economy have almost universally been beaten by the actual data and, while the UK seems to be doing pretty well economically, all the positive results coming from UK industry and commerce are overshadowed by the ‘B’ word. Brexit and the uncertainty over what happens next are dominating the Pound. The decision to hold interest rates at this historically low level in the UK has come partly in response to that strong economic performance and in part as a “holding pattern” until Brexit negotiations begin in earnest.
“Now that it’s all official; the Queen’s consent has been given and Parliament has grudgingly agreed, everything rides on Theresa May’s discussions with world leaders and what agreements can be reached. We do not believe there will be another decision of this nature on monetary policy until Theresa May’s formal Brexit discussions begin.”
Frayed nerves in Europe
There is noticeable nervousness in Europe at the impending Brexit. Germany’s Federal Minister of Finance, Wolfgang Schäuble, voiced his concerns about Brexit in a G20 pre-meet with world business leaders: "I am very concerned, to be very frank."
"I am convinced that… it's in our own interests to have a strong financial centre in London."
And aside from Brexit, the French election is also causing some concern.
It was also disturbing to hear of today’s attack on the International Monetary Fund (IMF) in Paris, adding to the already difficult situation in France.
US positive about economy and short-term prospects
In the US, the Federal Reserve raised their interest rates yesterday, viewing the economy as “roughly balanced” – for the short term at least. Housebuilding figures saw a spike for February – due to increased construction in unusually warm weather – which is a good sign for the US economy, particularly after last quarter’s disappointing slide. Unemployment figures also seem to be going down for the US, leading to positive sentiment overall.
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Notes to Editors
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