In a sudden turnaround, the Bank of England (BOE) has kept interest rates unchanged despite previous speculation of a rise. The MPC (monetary policy Committee) has voted 7-2 for maintaining the rate at 0.5%. The move has surprised most market analysts. As a result, the pound fell to $1.35 on May 10.
Analysts on Tenterhooks
The chief market analyst of CNC Markets said, “So yet again we have to digest another change of tack from Bank of England policymakers.” He also said that this decision will complicate the credit situation in the country and make the markets unpredictable. In the next two years, consumer price inflation is expected to ease to 2.1%.
The British economy has only grown by rate at 0.5%., which is much lesser than the predicted 0.4% and one of the main reasons for holding the rates constant. Victoria Clarke, an Investec economist observed that probably the Bank of England could be waiting til August to see if the second quarter data can show a strong comeback, paving the way for a round of rate increase in that time period.
Impact on Markets
Analysts at AJ Bell, an investment firm, were of the opinion that the continuous flip-flop has impacted the pound heavily but can be a positive for the real estate and utility sectors. Historical data suggests that whenever BOE has kept the rates unchanged these sectors have performed well.
BOE governor Mark Carney clearly stated that as the Asian markets were a bit down and the stormy weather in Britain resulted in massive unemployment in the construction sector, decision-making slowed down. However, the governor expects this to improve in the next quarter.
The exit of UK from the European Union and a slowing European economy are some of the important factors for the slowdown of the economy. BOE has cut the GDP forecast from 1.8% to 1.4% and downgraded projections from 1.8% to 1.7% in 2019 and 2020.
In March, the manufacturing output dropped 0.1% for the second consecutive time after February, when it had dropped by 0.2%. Per the Office for National Statistics, the decline is a result of reduced electrical equipment and pharmaceutical production. The cold weather hampered the construction sector with a 2.3% fall in March.
