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Economists seek meaning in BoE's decision to hold rates
Economists and analysts were divided as they tried to make sense of the Bank of England's decision to keep rates on hold while trimming its economic forecast.
Markets had expected the BoE to increase rates at its May meeting until Governor Mark Carney highlighted mixed economic data in April. Since then a string of gloomy figures, including stalling first-quarter GDP growth, have raised concerns that the economy is weakening.
The monetary policy committee voted 7-2 to keep rates at 0.5% as the BoE cut its 2018 growth forecast to 1.4% from 1.8%. But most of the committee thought the weak first quarter was a "soft patch" and that the official GDP growth estimate of 0.1% would be revised up.
David Owen, chief European financial economist at the stockbroker Jefferies, said the BoE's commentary suggested this year's rate rise had been delayed rather than abandoned.
"August BoE rate rise on the cards," Owen wrote. "7-2 vote, but more significant is the BoE's belief that the UK grew at 0.3% in Q1, NOT 0.1%, so economy not as weak as some data suggests with very limited degree of slack."
The British Chambers of Commerce agreed the MPC still seemed primed for a rate rise this year but its head of economics, Suren Thiru, was less sanguine than the BoE about the economy's prospects.
Thiru said: "The Bank of England remains too bullish about the UK's growth prospects over the next few years [...] Business investment is likely to be more sluggish than the Bank of England is currently forecasting, with the cost of doing business in the UK likely to weigh on investment decisions.
"With UK economic conditions subdued and inflation weakening, the case for a rate hike continues to look limited at best. The preferred option would be for the MPC to opt for a sustained period of monetary stability. While interest rates will need to be normalised at some point, it should be done slowly so as not to weaken the UK's growth prospects."
Barclays' economists Fabrice Montagne and Sreekala Kochugovindan said the BoE's decision to cut the annual growth forecast was confusing because it treated first-quarter weakness as a trend rather than a blip. The MPC will put more onus on responding to indicators rather than sending signals to the market, they added.
They said: "The MPC is sticking to discussing the pace of the increase but not any specific moments in the future. With the MPC now sitting on the fence, rate expectations will likely be very data dependent going forward. Our initial take is that today's MPC shift supports our view that rates will likely remain on hold indefinitely as data will continue to contradict expectations of a pickup."
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said he didn't think the MPC had become much more dovish and that rate setters were right to hold back on signalling the next rise before getting a clearer picture of the economy.
Tombs said: "We continue to think that the odds of the August rate rise are slightly above 50% ... But the committee will be sensitive to the activity data too, and given that business surveys so far suggest the risks to its new GDP forecast lie to the downside, the next rate rise easily could slip back to November.
Some analysts were less understanding about the BoE's change of mind and called for clearer communication after Governor Mark Carney's latest attempt at forward guidance faltered.
Tom Stevenson, investment director for personal investing at Fidelity International, said: "Leaving the base rate at 0.5% - what was once thought of as an emergency rate - is another big U-turn for the Bank of England Governor. If the forecasts are right then expect interest rates to remain lower for longer as UK growth lags the rest of the world, inflation subsides and Brexit clouds remain. This is good news for borrowers but piles yet more misery on savers."