Bank of England keeps rates on hold but hints at May rise

Bank of England keeps rates on hold but hints at May rise

LONDON – The Associated Press
Bank of England keeps rates on hold but hints at May rise

The Bank of England kept its interest rates unchanged on March 22 but appeared to issue another broad hint that they may rise again in May to get inflation back to target.

The minutes to the meeting showed that two of the nine members on the Monetary Policy Committee backed an immediate quarter-point increase in the bank’s main interest rate to 0.75 percent. The other seven, including Governor Mark Carney, preferred to keep it unchanged at 0.5 percent.

Ian McCafferty and Michael Saunders argued that a “modest tightening ... could mitigate the risks from a more sustained period of above-target inflation that might necessitate a more abrupt change in policy and hence a greater adjustment in growth and employment.”

Though they were in the minority, the minutes indicated that a majority in the committee is ready to back another interest rate hike soon. In November, the bank raised interest rates for the first time in a decade to get inflation down even though the British economy had slowed down in the face of uncertainty related to the country’s exit from the European Union.

As in February, the minutes showed that the “best collective judgment” of the rate-setting panel was that “an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target at a more conventional horizon.”
Rate-setters also said future increases were likely to be “gradual” and “limited.”

In February, when the bank published its quarterly economic projections, Carney indicated that another rate hike in May was likely. Economic figures since then, according to Thursday’s minutes, were “broadly consistent” with the views set out in February.

That comes despite figures this week showing that inflation in the year to February fell by more than anticipated to an annual rate of 2.7 percent. Still, that remains above the bank’s target of 2 percent. February’s projections showed inflation remaining above target for a year or two yet, supporting expectations for at least one more rate hike this year.

Of further concern to those backing higher rates was confirmation that wages are rising and households will soon start to see their real income levels increasing again as pay growth outstrips inflation.

Britain’s vote in June 2016 stoked inflation as the ensuing drop in the value of the pound raised the price of imported goods like energy and food. But while that pound-driven increase in prices is expected to ebb, the Bank of England believes a pick-up in wages will continue to support inflation.

There was little new insight provided in the minutes regarding Brexit, bar a reference to the fact that the British government has secured the outlines of a transition deal with the EU for a period after Brexit day on March 29, 2019. During the transition period, which is to last until the end of 2020, Britain will remain a member of the tariff-free European single market and customs union despite not having a say in setting policy. Carney has been one of the more vocal advocates in favor of quickly agreeing on a transition deal so that businesses can plan ahead.

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