BOE downs the pound, weak US CPI hardly helps

BOE downs the pound, weak US CPI hardly helps

CPI Inflation now sits at 2.3% and earlier predictions of solid economic growth through this year had led many to expect the Bank to vote to increase the base rate from 0.5%, where it has been for much of the past 8 years, bar a dip to 0.25% during 2017.

On growth, the BoE said "very little spare capacity remains in the economy", which grew only 0.1% in the first quarter, down from 0.4% in the fourth quarter of 2017, hampered by poor weather. Financial markets price in a roughly 65 percent chance of a rate rise by then, according to interest rate futures.

An interest rate rise would have helped to strengthen the Pound, but in the event it slipped back from $1.3617 before the decision to trade at $1.3500 at the time of writing (recovering from a low of $1.3471).

Significantly, the central bank dismissed most of the slowdown in the first quarter GDP growth as being temporary and continued to envisage a rebound in the second quarter GDP growth.

Carney was consistently forced to defend the BOE's communication strategy since February's meeting, a period which marked something of a roller-coaster ride for investors. Since an increase to interest rates tends to slow spending and borrowing and therefore reduce economic growth, the decision was made to hold interest steady for the time being.

The majority of the MPC noted the recent weak numbers and said there wasn't much cost to waiting to assess the economy more fully.

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The BOE isn't the only central bank to wobble on the exit ramp from the easy money of the past decade, even as the U.S. Federal Reserve sticks to its plan to gradually raise rates.

Practically, this largely involves the Bank adjusting interest rates to try and keep inflation at, or as close to, a target of 2%. Sweden's Riksbank and the Bank of Canada have also revised their tightening expectations.

"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. Under these assumptions, the Bank's inflation forecasts were downwardly revised a bit, with inflation now seen back to target at the end of two years and holding steady over the remainder of the forecast horizon. It still sees a small amount of excess demand in the economy by early 2020.

In a Reuters poll published on Wednesday, all but three of 62 economists polled between May 3 and 8 expected no change in rates.

The preliminary estimate of the U.K.'s GDP growth in the first quarter was 0.1 percent, 0.3 percentage points lower than expected in February, the bank said.

It reiterated that the U.K.'s negotiations to leave the European Union constrain supply, making the scheduled March 2019 split the main challenge for rate setters. The outlooks for 2019 and 2020 were unchanged at 1.7 percent.

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