Interest rates on hold as Bank cuts growth outlook

The central bank noted that CPI fell to a lower rate than expected in March, of 2.5% year over year, and now expects CPI inflation to fall back slightly more quickly than in forecast in February. It was just a couple of weeks ago that we and most in the market strongly believed in a May rate hike, but Carney's comments and the soft patch in the data had squashed such hopes. "The opportunity window for further rate hikes may have closed for the Bank of England", Dall'Angelo said. A hiking cycle consisting of only one quarter-percentage-point increase barely qualifies as a cycle.

Money markets now show the probability of an August increase in borrowing costs as only about 50%, and a hike by the end of the year - previously fully priced in - at about 85%.

Canadian Dollar exchange rates, meanwhile, continued to draw support from the relative bullishness of the oil markets and the prospect of reduced Iranian crude supplies. That was in line with forecasts from economists polled by Reuters in the past week. For 2019 and 2020, it predicted GDP growth would pick up to 1.7 per cent, down from 1.8 per cent in its February forecasts.

"While the storms of February and March have given way to sunnier skies, the economic outlook for the United Kingdom remains clouded by Brexit uncertainties", Carney said.

'Despite the welcome agreement on a transition period, the terms on which the United Kingdom will trade with the European Union and beyond that period remain to be determined. In the MPC's central forecast, conditioned on the gently rising path of Bank Rate implied by current market yields, GDP is expected to grow by around 1¾% per year on average over the forecast period.

Whilst the Bank of England (BoE) did not have early access to today's data, it could still effect the sentiment of Bank Governor Mark Carney in his later press conference and indeed the outlook moving forward.

Everywhere you look, the economic argument for raising rates is weakening. There's still a lot of uncertainty over Britain's post-Brexit relationship with the EU. Wage growth and cost pressures have been firming gradually, broadly as the BoE expected. This was lower than the previous forecast.

Carney and his colleagues will keep beating the rate hike drum, even if only lightly, to keep a floor under sterling. Bank of England officials, including Governor Mark Carney, had appeared to endorse that expectation.

In 2014 one United Kingdom lawmaker likened the Bank to an "unreliable boyfriend", a label that has stuck and which, judging by Carney's news conference on Thursday, clearly irritates him.

Practically, this largely involves the Bank adjusting interest rates to try and keep inflation at, or as close to, a target of 2%.

  • Eleanor Harrison