Bank of England holds interest rates and slashes growth forecast

The Bank of England (BOE) held interest rates steady Friday, after a first-quarter slowdown in economic growth tarnished the case for higher borrowing costs.

The decision marked a sharp contrast to widespread expectations just a few weeks ago, as Threadneedle Street voted 7-2 to keep rates on hold at 0.5 percent.

Earlier in the year, The Bank of England Governor, Mark Carney had called for interest rates to be raised “somewhat earlier” and “by a somewhat greater extent” than the roughly two-and-a-half hikes already priced into the market over the next three years.

Yet, in the third Monetary Policy Committee (MPC) review of the year, Britain’s central bank left benchmark rates unchanged after a flurry of weaker-than-expected economic data and a Brexit-driven jump in inflation.

Sterling pared all of its earlier gains to fall to session lows following the BOE’s decision to hold rates on Friday.

Before the announcement, the U.K. currency stood 0.4 percent higher against the U.S. dollar at US$1.3618. But, shortly thereafter, sterling was off by 0.2 percent at US$1.3521 — not far off four-month lows against the greenback.

Weak economic data

The U.K. economy barely grew in the first quarter of the year. Britain’s gross domestic product (GDP) came in at a tepid 0.1 percent quarter-on-quarter, below consensus of 0.4 percent and the BOE’s own forecast of 0.3 percent.

“The recent weakness in data for the first quarter had been consistent with a temporary soft patch,” the majority of the central bank’s MPC said in a statement.

“There was value in seeing how the data unfolded over the coming months, to discern whether the softness in Q1 might persist,” they said.

That appeared to leave the door open for a rate rise in August — which is the next time the BOE is scheduled to update its economic projections.

Policymakers Ian McCafferty and Michael Saunders, who had voted in favor of a rate hike in March, agreed with more hawkish MPC members that subdued data this year had reflected “temporary or erratic factors.”

Nonetheless, they remained in favor of raising rates for only the second time since 2007 on Friday and warned delaying a rate hike could risk more abrupt tightening later on.

Last month, Carney shocked investors by highlighting the country’s “mixed” economic data in an apparent attempt to temper expectations of monetary policy tightening in May — which financial markets had viewed as a near certainty until recently.

Since then, almost all the gauges of Britain’s economy have been weaker-than-anticipated —thus ultimately delaying a move to lift rates to a post-financial-crisis high of 0.75 percent.

Carney said U.K. households and businesses should prepare for interest rates to rise to a “limited and gradual extent” over the next two years.