Economy

The Bank Of England Turns Dovish In May And Walks Away

The Bank Of England Turns Dovish In May And Walks Away

The dovish turn of the bank is framed by lower inflation and growth forecast and shifting drivers from external to domestic factors. "Stock markets don't tend to like rising interest rates much, so an environment where rates rise only gradually should be supportive for the United Kingdom stock market". However, recent activity has seen both two-year fixed mortgage rates and certain savings rates move upwards, so it seems that neither group will have much to cheer or cry about.

The minutes of this week's monetary policy committee meeting show that rate rises are still being planned in order to meet the government's 2% inflation target, but the language was notably softer than in February when the Bank said policy would probably need to be tightened earlier and to a greater extent than the markets were expecting. This is good news for borrowers but piles yet more misery on savers.

Practically, this largely involves the Bank adjusting interest rates to try and keep inflation at, or as close to, a target of 2%. Governor Mark Carney said momentum will build up again as the year progresses.

Any decline in full time employment may give investors incentive to pile out of CAD exchange rates, as a looser labour market would encourage the Bank of Canada (BOC) to remain on hold for longer.

Two members of the committee - Michael Saunders and Ian McCafferty - said rising pay caused by falling unemployment required an immediate increase in interest rates. The first rise in a decade from the historical lows of 0,25% started in November 2017. Britain leaves the European Union on March 29 next year, and there will be a transition period to the end of 2020, but huge uncertainty surrounds the terms of departure, trade agreements and customs arrangements.

The MPC said the Bank's projections in its latest inflation report are "broadly similar to those set out in the previous report".

And there are fears that the first-quarter slowdown may not just be a weather-related blip, with official data revealing more widespread weakness and survey data for April showing little sign of a bounce-back.

He added: 'However, the Bank is also anxious that the underlying pace of economic growth may have in fact waned so far this year.

Data from the Office for National Statistics showed that United Kingdom industrial production grew marginally again in March.

How the Bank now sees inflation playing out over the next three years. But "there was value in seeing how the data unfolded over the coming months", they added. But these expectations can change rapidly - less than a month ago, the probability of a hike today was as high as 90 pct.

Not helped by the earlier timing of Easter, retail sales decreased by 4.2 per cent on a like-for-like basis in April compared to the same month past year, the biggest ever decline since the British Retail Consortium and KPMG records began in 1995. Money markets now fully price a rate increase by November.


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