Instant View: BoE leaves rates unchanged, as expected

LONDON (Reuters) - The Bank of England held interest rates at a record low of 0.5 percent on Thursday, as expected, amid signs Britain's economic recovery is losing steam.

The vast majority of the 62 economists in a Reuters poll had forecast the steady rate verdict, and markets are not fully pricing in a quarter-point hike until early 2012.



"... the drop in inflation in March will most likely be temporary of nature. Indeed, we expect it to resume its upward trend on the back of the recent surge in oil prices. The recent rise in producer prices also points in this direction.

Against the backdrop of a modest but sustained recovery, this should start to reignite worries at the MPC that inflation expectations will become dislodged and that second round effects will eventually materialize.

"We expect that by August it should be clear that the recovery will remain on track, inducing the BoE to start lifting the Bank Rate from its current historically low level.

"We have penciled in a 25 basis points rate increase at that meeting, followed by another 25 basis points rate increase in Q4, taking it to 1 percent at year-end.

"In 2012, we expect the BoE to step up the pace of rate hikes as the economy gains momentum. We anticipate a total of 175 basis points of rate increases next year, taking the Bank Rate to 2.75 percent."


"While inflation remains uncomfortably high, and will go higher still in the coming months as energy price increases pass through, the recent evidence of a marked slowdown in domestic economic activity has probably convinced the majority of MPC members to take a 'wait and see' view.

"A key reason why this majority of MPC members are reluctant to raise rates is the fragility of consumption. This is being hard hit by inflation running well above pay increases and is likely to be further constrained by fiscal tightening.

"Our assumption has been for unchanged policy in May but a rate rise in August, in tandem with the next but one Inflation Report, by which time inflation will be higher still. However, further evidence of weakness in the economy going forward would make a rate rise on that time horizon much less probable."


"In recent weeks, relatively soft UK activity data ... had removed any realistic expectations of a rate hike today.

"For now we still view an August hike to be the most likely outturn. However we will be tempted to push this back to November or beyond, should the run of activity data continue to disappoint, or indeed if the tone of next week's Inflation Report is more dovish than we expect.

"Our view of when rates should rise is still that the committee should wait until there are sufficient indications that the fiscal consolidation program is not impacting the recovery unduly. To our minds this means that rates should not rise until November at the earliest.

"This will have been Andrew Sentance's final MPC meeting, and in June he will be replaced by Ben Broadbent (formerly of Goldman Sachs). We doubt that Broadbent will be as hawkish, but it remains to be seen whether the change of personnel will be sufficient to alter the dynamics on the committee."


"No change, so no surprise there. The slew of disappointing data over the past few weeks ensured that any lingering chance of a hike today had evaporated.

"Although high near-term inflation is clearly concerning for the Bank of England, once the increase in VAT and high commodity prices fall out of the annual calculations, it is likely to drop close to the 2 percent target next year.

"And with economic growth set to be subdued, unemployment likely to rise further, continued weakness in credit growth, and stringent fiscal consolidation yet to bite, the majority on the MPC will be in no hurry to tighten monetary policy.

"As such, our view now is that the first rate increase will be pushed back, most probably to early next year."


"The Bank of England's decision to keep interest rates down at 0.5 percent reflects current serious concerns and uncertainties over the state of the economy and its ability to withstand the fiscal squeeze that increasingly kicked in from early April.

"It will be very interesting to see when the minutes of the meeting are published whether or not the MPC were more dovish in view of the recent largely disappointing news on the economy. Martin Weale, who has been voting for an interest rate hike since January has recently admitted that the economy has been softer than he expected.

"Also significantly, the dynamics with the MPC could now change significantly, as the arch hawk Andrew Sentance is now leaving. Of course, it remains to be seen what stance his successor Ben Broadbent takes, but it seems unlikely that he will be as hawkish as Sentance has been."


"No change in policy had been widely expected going into the meeting, including by us.

"Relative to expectations from as recently as a month ago, this outcome was a surprise, but the revelation of a surprisingly cautious reaction function in the minutes to the MPC's April meeting had readjusted expectations.

"However, while the strength of the recovery has become more questionable, the inflationary news has tended to be to the upside.

"We do not expect there to have been any further changes in the vote split at the May meeting. Although the more hawkish elements of the MPC have sounded more tentative, we expect the rigorous forecast update for the May Inflation Report to allay those concerns and prevent divergence away from the treacherous track to tighter policy."


"Furthermore, with weak growth likely to limit corporate pricing power and the VAT hike falling out of the annual comparison from January next year we see inflation moving below the 2 percent central target for much of 2012.

"Given this it seems to us that November is probably the earliest that the BoE will raise interest rates."

Comments obtained before the decision:


"The middling growth figures for the start of this year were unlikely to tilt the balance of votes toward a rise this month. The recovery faces some stiff challenges over the rest of the year that could still create the perfect storm that could at best keep the economy on a plateau, or worse force a retreat back down the hill. So long as the underlying economic recovery remains murky the case for a rate rise can't be made until it becomes clearer."


"Given the recent mixed signals about the current strength of the economy, it is not surprising that MPC members have decided to keep interest rates on hold again.

"While the recovery continues to make progress, recent economic data show that it is very patchy across sectors, and some parts of the economy remain fragile. However, pipeline inflationary pressures have intensified, with our economic surveys showing rapid cost inflation from increased energy and commodity prices. Our view remains that the Bank is likely to move away from the emergency 0.5% rate later this year."