Published: Fri, May 11, 2018
Economy | By Shawn Conner

BoE Guv says modest rate hikes needed even as inflation cools

According to Reuters, "Britain's economy grew more slowly than most of its peers past year after a Brexit-driven jump in inflation hit consumer spending power and some businesses delayed long-term investment".

Note from the bottom line on the chart above that the pair is still in "oversold" territory - although less so than it was earlier this month, suggesting that a rally is the more likely option.

"If the forecasts are right, then expect interest rates to remain lower for longer as United Kingdom growth lags the rest of the world, inflation subsides and Brexit clouds remain". United Kingdom inflation remains comfortably above target, while policymakers may deem the recent poor data as temporary, leaving the option open for a hike in August.

The majority of rate-setters preferred to wait to raise rates to "discern whether the softness in the first quarter might persist".

Interest rate rises should only be very gradual once they do start.

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"Those looking for interest rate movements should point their gaze to August and November as these meetings are accompanied by the quarterly inflation report".

Mark Carney, the governor of the Bank of England, and his eight rate-setting colleagues are striving to become more predictable in signaling when Britain's interest rates will rise again. 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.

While the recent hike in temperatures received a warm welcome by the British public, an increase in interest rates would have been far tougher to the stomach and United Kingdom homeowners will be very glad to see their monthly mortgage payments remain unchanged, for the immediate future at least.

But in a press conference Bank of England Governor Mark Carney said the "underlying pace of growth remains more resilient than the headline data suggests".

The Pound fell like a knife on Thursday after the release of the Bank of England (BOE) inflation report which slashed its latest GDP growth forecasts for the second quarter of 2018 from 1.8% to 1.4%.

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But slowing consumer lending and a sluggish housing market created greater-than-usual uncertainty about consumer demand, the BoE said.

Officials at the Bank have based their forecast on those predictions.

He added: 'However, the Bank is also anxious that the underlying pace of economic growth may have in fact waned so far this year. Positioning and limited sentiment for further downside means "risk-reward favors sterling-dollar upside going into the May BOE meeting", he said.

The preliminary estimate of GDP growth in the first quarter was 0.1%, 0.3 percentage points lower than expected in February. Competition among challenger banks, in combination with higher SWAP rates, appears to be fuelling this rise.

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