Pound slumps after Bank of England kills rate hike hopes

Ashley Carr
August 4, 2017

Unite said if the BoE fails to resolve the pay dispute, it would consult its members at the Bank in departments other than just maintenance and security on further action.

However, most of the economic data released over the past month has disappointed and Mr Haldane ultimately voted to keep rates on hold this month.

Furthermore, the Bank cut its annual GDP forecasts for 2017 and 2018 to 1.7% and 1.6% respectively from the previous 1.9% and 1.7%.

The irony is that some of this money has come courtesy of the Bank of England, which lent the High Street banks £100bn in super-cheap money last August to combat the perceived risks to the economy of the European Union referendum vote.

"Brexit downside risks are larger than the MPC can formally acknowledge, which keeps the bar for a pre-2019 rate hike high, in our view", analysts at the bank said in a note to clients. The Committee voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion.

Overall, the Bank's decision, minutes and language used in its quarterly Inflation Report lacked the hawkish tone that led to rising market expectations for an interest rate hike to be delivered this year.

The pound hit a nine-month low against the euro and fell by more than a cent against the USA dollar.

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The Bank said it might raise borrowing costs a bit more than investors expect over the next three years.

"Firms" prospects for the coming year have slipped to a level which has previously been indicative of the economy stalling or even contracting, having taken a lurch downward since the general election, largely reflecting heightened uncertainty about the economic outlook and Brexit process'.

"This is fairly non-committal language and didn't convince the FX market that the BOE is serious about hiking, especially since the hawkish contingent lost one of its members at this meeting - Kirsten Forbes left in June and her replacement, Silvana Tenreyo, didn't follow her footsteps instead choosing to vote with the pack".

The fall in the value of the pound has caused inflation to spike - it is expected to peak at 3 per cent in the autumn.

"As a effect, the household saving ratio fell from 3.3% to 1.7%, its lowest level since the series began in 1963". "The BoE should be encouraged, as well, by noises from the United Kingdom government which supports its assumption for a transitional Brexit agreement". However, it has signalled the end of the Term Funding Scheme, created to make cheap money available to banks.

It blamed the downgrade on Britain's stubbornly weak productivity and in part on the Brexit uncertainty. It expects inflation, now at 2.6 per cent, to peak at 2.7 per cent in the final quarter of this year and to gradually fall to 2.2 per cent over the next three years, slightly above the Bank's official 2 per cent target.

The Bank's inflation forecast was largely unchanged from May.

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