It was an interesting day for announcements from the Bank of England, although possibly none that can be genuinely considered to be ‘breaking news’.
In a surprise to nobody, the Monetary Policy Committee voted to keep interest rates on hold at the record low of 0.5%.
This is the 83rd consecutive month interest rates have been at 0.5%, continuing to set expectations that low interest rates are the new normal.
At the same time its asset purchase facility was held at £375 billion. This the commonly referred to as quantitative easing.
What did come as a surprise to many commentators was the unanimous vote for interest rates to remain on hold this month.
The MPC voted 9-0 to keep interest rates at 0.5%, which means Ian McCafferty voted for no change for the first time in six months; he has previously been calling for interest rates to rise.
It’s important we don’t draw too many conclusions from this voting direction of a single MPC member alone.
What is perhaps more telling was the latest Inflation Report from the Bank, in which it cut its economic growth forecast for the UK.
Back in November, at the time their last Inflation Report was published, the Bank was predicting the UK economy would grow by 2.5% this year.
That forecast has now been revised down to 2.2%.
Looking ahead to next year, the Bank believes the British economy will grow by 2.3%. This is down from its previous forecast of 2.6% for 2017.
Commenting on the news out of the Bank of England today, Schroders Senior European Economist, Azad Zangana said:
“The shift in voting suggests that the balance of risks has shifted to the downside on growth and inflation.
“Indeed, the MPC meeting minutes suggest that the worsening international outlook has adversely impacted global commodity prices, international trade and has tightened global financial conditions.
“These factors are likely to be having a negative impact on UK growth.”
So when might interest rates start to rise, given what we learned about the outlook for the economy today?
We think it’s unlikely to happen anytime soon.
Markets now place a greater probability on the Bank cutting rates this year. They are not pricing in a rate rise until the middle of 2018.
Schroders tell us their own forecasts are for a first rate rise towards the end of this year. But they also forecast economic growth to slow in 2017 as a result of accelerated austerity and higher inflation.
This suggests the Bank might need to pause its rate rising cycle once it has started, or even reverse it.
Where do you see interest rates going next? What forecasts have you made for your own Financial Plan?
