The Monetary Policy Committee (MPC) voted unanimously to maintain stock of its corporate bond purchases at £10bn and its UK government bond purchases at £435bn.
Inflation is expected to ease further in the short term although to remain above the 2% target. It fell from 3% to 2.7% between January and February.
It expects pay growth to rise further in response to the tightening labour market.
“The prospects for global GDP growth remain strong, and financial conditions continue to be accommodative, with little persistent effect from the recent financial market volatility,” a statement accompanying the decision said.
The Bank expects Q1 GDP growth to be in line with 0.5% growth in Q4 2017; however, it downgraded Q4 2018 GDP growth to 0.4%.
State Street Global Markets head of macro strategy Michael Metcalfe said the two dissenters in the MPC plus the accompanying statement will encourage interest rate markets to fully discount a tightening at May’s meeting.
“Given the fact that economic data has not been altogether positive in the past month, this will likely underline the Committee’s resolve to begin the slow process of normalising monetary policy in the face of still stubbornly high inflation, but very tepid growth,” Metcalfe said.
Brexit transition seals rate rises
Westminster Business School professor of applied economics Peter Urwin said odds are shifting towards three rate rises in 2018.
“Traders have been pricing in a 75% chance of a first rate hike in May, so this March meeting was never going to shock the markets with an even earlier rise. Overall, last-minute information released before today’s MPC meeting, such as the news that wage growth has ‘accelerated’ to 2.6%, strengthens the case for a rate rise in May,” Urwin said.
He said the agreement on a Brexit transition deal with the European Union had sealed the deal for a 25 basis points rate rise in May.
“The transition deal extends the period of uncertainty, but also pushes any significant economic hit into 2019 and beyond. The MPC is keen to return to something resembling conventional monetary policy conditions before any ‘hit’ – the transition period gives them time to achieve this, and to achieve it gradually. Therefore the odds are now shifting towards three rate rises in 2018, starting in May.”
However, Blackrock bond manager Ben Edwards said a May rate rise may be the summer hike brought forward rather than a significant chance of additional hikes.
