Bank of England keeps interest rate on hold at 0.75 pct

The Bank of England kept the Bank Rate on hold today at 0.75 percent, while two MPC members voted in favour of a rate cut. The rate guidance suggests downside risk to the Bank rate short term, noted DNB Markets in a research report.

The expectations were for a rate cut during this meeting, but it appears that slightly more positive data releases averted a rate cut this time. It was slightly surprising that only the two previous dissenters voted for a cut this time. The central bank still guides for a likely rate cut short term if the positive signals are not sustained.

During the previous two meetings, two of the external members both voted for a rate cut. Their view is that: “With a low neutral rate and limited monetary policy space, risk management considerations favoured a prompt response to downside risks at present in order to ensure a sustained return of inflation to the target.”

 According to the central bank, recent data have rebounded. Domestically, near-term uncertainties facing business and households have receded. Business activity surveys have picked up, quite noticeably in some cases, and investment intentions seem to have rebounded. Housing market indicators have bolstered and consumer sentiment has risen a bit.

BoE, in its guidance stated that “monetary policy will be set to ensure a sustainable return of inflation to the 2 percent target. Policy may need to reinforce the expected recovery in UK GDP growth should the more positive signals from recent indicators of global and domestic activity not be sustained or should indicators of domestic prices remain relatively weak. Further ahead, if the economy recovers broadly in line with the MPC’s latest projections, some modest tightening of policy may be needed to maintain inflation sustainably at the target.”

Data will determine whether rates would be lowered in months ahead, said DNB Markets. U.K.’s macro data have been soft in recent months, but there have been some positive signs recently. If these signs continue and the economy picks up, a rate cut seems less likely going forward.

“The development for inflation will also be vital, as headline inflation is already down to 1.3 percent YOY in December. If continued Brexit-uncertainty still weighs on the economy, a rate cut seems likely at one of the upcoming meetings”, added DNB Markets.