Mark Carney, the Band of England chief, had previously said the decision to raise rates “will likely come into sharper relief around the turn of this year”. We are now in the first quarter of 2016 but the BoE kept rates steady at its latest meeting with an 8 to 1 vote in favour of no change. Given the turmoil in international markets in recent weeks, the decision is not a surprising one. A recent Reuters poll of economist over the past week expects the central bank to start raising the official rate in the third quarter of 2016, later than the previous poll which saw a rate hike in the second quarter.
UK 10 year bond yields were slightly lower, dropping nearly 1.5bps to 1.73%, amid higher US and German comparable bond yields, perhaps as the market digested the Bank’s statement of a lower trajectory for rising rates than in the past. “All members agreed that, given the likely persistence of the headwinds weighing on the economy, when Bank rate does being to rise, it is expected to do so only gradually and to a level lower than in recent cycles.” The currency markets took a contrary view, pushing sterling higher against the US dollar and the euro after the Bank’s announcement but even so, the pound is trading near a 5 1/2-year low against the dollar and has been weakening against the euro since July.
Local reaction focussed on the tone of minutes from the meeting. Westpac said, “The BoE did not appear unduly concerned by recent price falls, rather noting the strong labour market. Rate hikes this year remain on the cards.” ANZ said the BoE had “acknowledged the net mild positive impact of low oil prices on the economy (despite weighing on inflation).”