Bank of England keeps rate unchanged, upgrades growth forecast

[LONDON] The Bank of England lifted its estimate of the economy and noted recent strengthening pay, keeping officials on course for future series of gradual interest-rate increases.

Policy makers said recent activity has been better than expected, raising their third-quarter estimate to 0.5 per cent from 0.4 per cent, according to minutes of their latest meeting at which they left rates on hold. Officials also noted that consumer spending and pay settlements appear to have been stronger than anticipated.

But they reiterated that Brexit was the biggest challenge to the outlook and that uncertainty about the UK's future outside the European Union had risen. With the government working on contingency plans for a no-deal Brexit, Governor Mark Carney has extended his stay at the BOE until early 2020. On Thursday, he even attended a Cabinet meeting to discuss preparations.

At the BOE decision on Thursday, the Monetary Policy Committee voted unanimously to hold the benchmark rate at 0.75 per cent after hiking at the last gathering in early August.

The central bank reiterated that "limited" and "gradual" rate increases will be needed to control inflation, and investors see the next quarter-point increase arriving in May. It was the first meeting for the BOE's newest policy maker Jonathan Haskel, an expert on productivity.

The pound edged higher after the decision and traded up 0.5 per cent as of 2.52 pm in London. The bank's analysis of financial markets revealed that there had been an increase in interest-rate options bets on a central-bank interest-rate cut in 2019. Investors also see greater downside risks to the pound.

The committee also noted that risks to global growth had increased as trade tensions escalated and emerging markets became more volatile. In Turkey, the central bank jacked up its benchmark interest rate by 625 basis points to 24 per cent on Thursday to stabilize the country's finances. The decision came hours after President Recep Tayyip Erdogan triggered tumult by repeating his hostility to higher borrowing costs. In Frankfurt, the ECB kept policy unchanged.

The BOE published the latest report from its agents around the country. They found that underlying consumer spending growth remained modest, and Brexit fears had contributed to a slight softening in investment intentions. However, the labor market remained tight and pay settlements had risen from a year earlier.

BLOOMBERG