Bank of England Keeps Rates Unchanged; Pound Pares Gains

20/06/2019 11:00:36 Economic Indicators

The Bank of England kept interest rates on hold at 0.75% on Thursday, but stuck to its message that it plans to raise rates despite an ongoing lack of clarity on Brexit.

The vote was unanimous, with all nine policymakers in favor of keeping rates on hold, despite two officials talking recently of the need for higher borrowing costs sooner rather than later.

The bank reiterated its forward guidance that further rate increases were likely to be required “at a gradual pace and to a limited extent”, despite revising down its growth forecast.

The decision was widely expected with most economists forecasting that borrowing costs will remain on hold until it's clear whether and on what terms the U.K. will leave the European Union.

The bank cut its economic growth forecast for the second quarter of this year to zero from 0.2% in May, citing concerns over Brexit uncertainty, the unwinding of stockpiling and ongoing global trade tensions.

“Underlying growth in the U.K. appears to have weakened slightly in the first half of the year relative to 2018 to a rate a little below its potential”, the bank's statement said.

The decision came a day after data showing that the annual rate of inflation in the U.K. eased back to 2% in May from 2.1% in April, in line with the BoE’s target. Meanwhile, wages are growing at their fastest pace in a decade.

Last month, BoE Governor Mark Carney warned that investors were underestimating how much interest rates could rise.

BoE Chief Economist Andy Haldane said this month that the time was nearing for a rate increase to prevent inflation pressure building. Michael Saunders, another member of the Monetary Policy Committee (MPC), said Brexit uncertainty was not a reason to delay tighter policy.

The U.K. is due to exit the EU on Oct. 31, but with staunch Brexiteer Boris Johnson the current front runner to succeed U.K. Prime Minister Theresa May, the likelihood of a no-deal Brexit or even a general election has risen.

The BOE’s slightly hawkish tone sets it apart from many of the world’s biggest central banks. The Federal Reserve on Wednesday left rates on hold and signaled it could cut rates later this year.

Earlier this week, European Central Bank President Mario Draghi said the bank will need to ease policy again if inflation doesn't head back to its target.

The British pound pared gains against the dollar following the decision, to trade at 1.2700, off an earlier high of 1.2727.

--Reuters contributed to this report