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Bank of England keeps rates steady, says sterling hit by EU vote

Thursday, March 17, 2016 - 20:56

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Bank of England policymakers said sterling had been dealt a big hit by uncertainty in the run-up to the referendum on EU membership and that growth could slow, after voting unanimously to keep rates steady.

[LONDON] Bank of England policymakers said sterling had been dealt a big hit by uncertainty in the run-up to the referendum on EU membership and that growth could slow, after voting unanimously to keep rates steady.

The central bank said the upcoming vote on June 23 could delay some spending decisions, though it said recent indicators suggested growth would keep the same momentum this quarter as it had at the end of last year.

The BoE reiterated that interest rates were more likely to rise than not over the next two years and that when they did the rise would be gradual, given likely headwinds.

After a rapid recovery in recent years, British growth slowed in the second half of last year and recent surveys show it had a rocky start to 2016, when the country will hold a referendum on its membership of the European Union. "There appears to be increased uncertainty surrounding the forthcoming referendum," policymakers said. "That uncertainty is likely to have been a significant driver of the decline in sterling. It may also delay some spending decisions and depress growth of aggregate demand in the near term." BoE Governor Mark Carney, in a recent appearance before lawmakers, pointed to some benefits of Britain's EU membership, but said the BoE would not comment on the long-term implications of an exit.

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Britain's economy has slowed, along with the rest of the world, and some policymakers worry they may struggle to fend off the latest global downturn after pumping trillions into the global financial system in recent years and given that interest rates in major economies are already so low.

The Federal Reserve on Wednesday said the United States continued to face risks from an uncertain global economy and appeared to sharply scale back its plans for interest rate rises this year.

The BoE said short term interest market rates had fallen due to market worries about the world economy, and the perception that the lower bound for central banks' interest rates could be lower than previously thought.

These looser financial conditions globally could provide the UK economy with some support.

It was the second month in a row policymakers voted unanimously to keep rates at a record low 0.5 per cent after Ian McCaffery, an external member of the Monetary Policy Committee, last month abandoned his rate hike vote citing a weaker outlook for wages.

The government on Wednesday sharply cut its growth forecasts for this year and next as it delivered its annual budget, after the central bank also revised down its growth estimates in the February inflation report.

The BoE expects the economy to grow 2.2 per cent this year and 2.3 per cent next year, more optimistic than the government's forecasts for 2.0 per cent and 2.2 per cent growth in 2016 and 2017 respectively.

Financial markets had fully priced out the possibility of an interest rate hike this year prior to the BoE meeting and some are even betting the first move will be a cut.

Inflation and wage growth have been sluggish for months, but have recently showed signs of a pick-up. Annual inflation edged up to a one-month high in January and wages grew by more than expected that month.

But this rise could struggle to gain momentum against the weaker economic backdrop, with the government on Wednesday also cutting its inflation forecasts for 2015 and 2016.

The BoE said the near-term outlook for inflation had changed little since the February inflation report, but added that it remained watchful for signs that low inflation might be weighing on wages.

The BoE has said it has more ammunition to help the economy if it is needed, but Governor Mark Carney has ruled out following in the footsteps of his European and Japanese counterparts with negative interest rates.

REUTERS

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