Bank of England likely to delay rate hike as economy slows

Carney gave a heavy hint just three months ago that the bank would raise interest rates again in May.

The MPC voted 7-2 to hold the rate steady, as predicted by all, but three, of 54 economists in a Bloomberg survey. Only one of 41 contributers to a Reuters poll correctly forecast the 0.1 pct quarter-on-quarter growth rate.

However, Carney also noted that the "economic outlook for the United Kingdom remains clouded by Brexit uncertainty", despite an agreement on a transition deal between the country and the European Union being welcome.

He said Thursday that rates would rise, albeit modestly, if the economy evolves in line with the bank's new projections.

There was bad news, however, for 2018, with the bank saying that it expects growth of just 1.4% in the United Kingdom this year, compared to 1.8% at its previous forecast.

Most BoE rate-setters said they should wait for evidence that Britain's economy was recovering from a weak start to the year before raising interest rates. Adding an interest rate hike would possibly tip the economy in recession territory.

BoE governor Mark Carney suggested in April that the central bank might not raise rates in May because of the mixed economic data, causing a sharp reversal in bets on a May hike.

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But the bank's caution is not expected to last indefinitely. The BoE said weaker inflation was due to a faster fading of the impact of sterling's plunge on import prices, and that domestic inflation pressures continued to rise.

A similar market measure, short sterling interest rate futures FSSZ8 priced in the lowest chance of a rate rise this year since January, after one of the biggest reductions in expectations this year.

ING's base case is for two of the nine MPC members to dissent and call for higher borrowing costs at the decision at noon in London, and for the central bank to downplay soft economic first-quarter growth and signal that a rate increase later this year is still in the cards. However, recent activity has seen both two-year fixed mortgage rates and certain savings rates move upwards, so it seems that neither group will have much to cheer or cry about.

But slowing consumer lending and a sluggish housing market created greater-than-usual uncertainty about consumer demand, the BoE said. The bank's forecasts for 2019 and 2020 were unchanged at 1.7%.

He added: 'However, the Bank is also anxious that the underlying pace of economic growth may have in fact waned so far this year.

The UK economy experienced its worst quarter in five years.

But afterwards it fell to trade 0.2% lower on the day at $1.3521, not far above a four-month low of $1.3485 hit on Tuesday. But it puts all this down to the first-quarter slump, which it suspects will be revised up to 0.3% from the initial estimate of 0.1%.

(Copyright © 2015. All Rights Reserved.)
 
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