No surprises as dovish BoE holds rates at historic lows

On their marks Unite members and workers in Carney masks picket the Bank’s head office in the City of London

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After UK inflation recently slowed and hawkish BoE policymaker Kristin Forbes stepped down from the Monetary Policy Committee (MPC), most analysts were unsurprised that only two policymakers voted to hike UK interest rates this week.

Rising levels of household debt could leave Britain's lower-income families dangerously exposed amid signs of an economic downturn linked to Brexit, Moody's credit rating agency said in his report published on Tuesday.

Still the BoE is basing its long-term forecasts under a "smooth" Brexit assumption according to Carney.

If the BoE wants to prepare markets for policy normalization, this needs to be reflected in the inflation report, which is released along with the rate decision. The bank also said there had been evidence that spending on cars, home wares and electrical goods had been falling.

Mr Carney said the Bank believes households and the wider economy could withstand a rate hike, "if appropriate".

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Lombard Odier Investment Managers investment strategist Charles St-Arnaud said the BoE's ability to raise interest rates by the end of the year would continue to be hampered by the Brexit negotiations. Additionally, a rise in interest rates could increase the value of sterling, which would make imports lower priced and help to increase the supply of goods/services.

In its quarterly Inflation Report, the Bank cut its United Kingdom growth forecast to 1.7% for this year, down from 1.9% previously, while growth is now tipped to slow to 1.6% in 2018, down from a previous forecast of 1.7%.

But he said the United Kingdom was "a little bit" better placed to cope with an interest rate rise.

"Brexit downside risks are larger than the MPC can formally acknowledge, which keeps the bar for a pre-2019 rate hike high, in our view", analysts at the bank said in a note to clients.

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Britain's central bank has cut it forecasts for the United Kingdom economy, saying it expects growth to remain "sluggish" over Brexit uncertainty.

It also comes amid the first strike by Bank of England staff for 50 years, with members of the Unite union protesting over a below-inflation wage rise. Inflation was broadly unchanged, but wage inflation was revised sharply lower, the BOE now expects real wages to fall by 0.5% this year, suggesting that the BOE (along with other global central banks) still haven't figured out how to fix the problem of low unemployment but stagnant wages.

Broadbent also said that while uncertainty is weighing on the economy, people are "holding their nerve".

Still, it's not the first time NIESR have missed the mark with a forecast.

"The MPC expects inflation to rise further in coming months and to peak around 3% in October, as the past depreciation of sterling continues to pass through to consumer prices".

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