Bank of England Keeps Record
Bloomberg News
The Bank of England kept its key interest rate at a record-low today after persistent weakness in inflation and wage growth reinforced the case for keeping emergency stimulus.
The Monetary Policy Committee's decision also came against a backdrop of a weakening euro-region economy and tensions with Russia over Ukraine. It was the last before Scotland holds an independence referendum that threatens to break the U.K. apart.
While the MPC split last month, with two of the nine members voting to increase the rate by 25 basis points from 0.5 percent, others led by Governor Mark Carney said economic circumstances didn't justify such a move. They cited the potential for 'shocks' to the economy from a premature tightening.
'The news on the month, if anything, has probably provided more cause to delay for the majority,' Daniel Vernazza, an economist at Unicredit in London, said before the announcement. 'While we've argued that the MPC should look through this period of below-target inflation because the forces weighing on it will wash out eventually, it will likely add to those getting cold feet for an immediate rate rise.'
Today's decision was correctly forecast by all 49 economists in a Bloomberg News survey. The MPC also kept its quantitative-easing program on hold.
BOE Splitters
Martin Weale and Ian McCafferty voted for a rate increase in August, saying there are signs wages are set to pick up and that early action would enable the MPC to fulfill its plan for 'gradual' tightening.
Economists in a Bloomberg survey forecast a rate increase in the first quarter of next year. Sonia contracts show traders are betting the BOE will refrain from raising until May.
The MPC meeting came two weeks before Scotland holds a referendum on whether to end three centuries of union with the U.K.
Nationalists are gaining ground before the Sept. 18 vote, and victory for the Yes campaign could deliver a shock to the British economy that would reinforce the case for keeping rates on hold. Markets are already showing jitters, with the pound at its lowest against the dollar since February and volatility jumping by the most in almost six years this week. Ten-year gilts yield the most relative to equivalent German bunds since 1997.
Economic Outlook
Britain's economy has grown 0.8 percent in each of the past two quarters and is on course to be the best performer in the Group of Seven this year.
Nevertheless, Carney says weak wages and a lack of inflation pressures weigh against a policy change now. Consumer-price growth slowed to 1.6 percent in July, its seventh month below the 2 percent target. BOE forecasts show the pace of economic growth will cool.
Evidence of a slowdown is already emerging. An index of factory growth fell to the lowest level in more than a year in August. While services strengthened, there were signs of weakness, with new orders and confidence among firms slipping.
Some of the drag on the U.K. recovery stems from the euro area, its biggest export market, where growth stalled in the second quarter.
Fifty one of 57 economists in a Bloomberg News survey predict the European Central Bank will keep its benchmark interest rate on hold at 0.15 percent today. Six forecast the key rate will be cut by 10 basis points and the deposit rate lowered by the same amount to minus 0.2 percent.
The ECB will announce its decision at 1:45 p.m. in Frankfurt, and President Mario Draghi will hold a press conference 45 minutes later.
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