BoE holds interest rates, cuts growth forecast

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The Bank of England (BoE) today made a decision to keep interest rates at 0.5% in measured response to relatively weak economic data for 1Q2018. ING Groep NV's currency strategist Viraj Patel said sterling is "clinging on to a hawkish BOE". The BoE on Thursday cut its forecasts for inflation and for growth, especially in 2018, reflecting the weak first-quarter figures which the central bank said would probably be revised up.

However, depending on the voting pattern, the pound could rally more than 2 percent or fall 1.4 percent from around $1.3545 now, according to ING. Since he joined the BoE in 2013, Carney has signalled several times that the time was nearing for rates to rise from the historic low of 0.5 percent reached during the 2008-09 financial crisis, only for economic data to surprise him.

Sterling steadied in early trade, having fallen to a four-month low against the dollar on Tuesday, as markets priced diverging prospects for growth and interest rates on the two sides of the Atlantic. The money market is now pricing in no further hikes for this year.

"Given previous remarks from the MPC on the timing and the path of future rate hikes, the question now remains as to when the Committee will look to increase rates in 2018, assuming that growth picks up again in the coming months". In the weeks leading up to the actual decision, there had been some speculation that the Bank would act to tighten monetary policy on the back of Governor Mark Carney's comments, but it has been odds on for some time that the MPC would delay a rise until (probably) August.

He said: "Weaker than expected GDP growth, stifling house prices, not to mention inflation falling faster than anticipated, did Carney have any other choice but to hold rates?" It still sees a small amount of excess demand in the economy by early 2020.

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It said the economy was "sluggish" in the first quarter, but said the bad weather had "little impact overall", suggesting it thinks the economy has underlying problems. "As Brexit looms on the horizon the United Kingdom economy is growing slower than global peers, with no acceleration in sight".

As recently as a couple of weeks ago, financial markets were factoring in a 90 percent probability that the central bank would increase in May its base interest rate by a quarter point to 0.75 percent. Higher interest rates exert downward pressure on inflation, and lower interest rates push it up.

"With rates still rooted at emergency levels, this is one of the challenges faced by the Bank and how it chooses to deal with this will be key to the success of the United Kingdom economy in coming years".

He added: "As negotiations progress this year, the medium time economic climate will become more clear".

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