The Bank of England was unexpectedly dovish regarding monetary policy Thursday, with the decision to leave interest rates unchanged at 0.5%, and hints that rates could remain at historically low levels until 2017.
Nicknamed “Super Thursday” as the day the BoE releases its rate decision, Monetary Policy Committee minutes and the inflation report, sources in the money management industry said the bank was more dovish than had been expected.
The MPC voted 8-1 to retain interest rates at 0.5%. Sources had expected at least one additional vote by MPC members to hike rates. Further, the bank said the existing £375 billion ($578 billion) asset purchase program remained unchanged.
In opening remarks published on the BOE website, Mark Carney, governor of the Bank of England, highlighted that inflation remains near zero and reaffirmed the expectation that when any rate hike occurs, “they can be expected to be limited and gradual.”
Inflation is expected to remain below 1% until the second half of next year, a revision from August’s inflation report when the return to 1% inflation was forecast for the first quarter 2016. Forecasts of gross domestic product growth are also slightly weaker, said Richard Benson, managing director, co-head portfolio investments, at Millennium Global Investments, in an e-mail.
“I suspect to some degree the dovish twist was rather a reaction function to the sharp repricing of U.K. money market expectations in the last two weeks,” Mr. Benson said. It is also likely that concern remains around a currency overshoot, he added. “Governor Carney emphasized much more a persistent drag from previously (pound) strength and the drag on demand from softer emerging markets.”
Mr. Benson said Millennium Global Investments remains comfortable with its forecast of a rate increase next spring, especially if the U.S. moves to hike interest rates in December.
“Mark Carney put some distance between the U.S. and U.K. outlooks today with the Bank of England rate hike expectations easing back to 2017,” said Richard de Meo, managing director at foreign-exchange specialist firm Foenix Partners, in a statement.
Following the news, 10-year gilts dropped three basis points to 1.965%, said Darren Ruane, head of fixed income at Investec Wealth and Investment, in a separate statement. The FTSE 100 was up around 40 basis points to 6,410, and “a weaker sterling has emerged with (the pound/euro ratio) lower by 1 cent to $1.405,” Mr. Ruane said.
Separately, the central bank of Norway, Norges Bank, maintained interest rates at 0.75%.
