Pound Slides After BOE Keeps Rates Unchanged, Warns “Little Closer” To Limits Of Inflation Tolerance

The Bank of England kept its key interest rate at 0.25%, gilt purchase program at GBP435b, and corporate-bond plan at GBP10b, voting 9-0 on all 3 decisions. The BOE also raises growth forecasts, while keeping its inflation forecasts broadly unchanged, and said the current policy stance “depended on the trade-off between above-target inflation and slack in the economy.” The central banks also reiterated that “monetary policy could respond, in either direction, to changes in the economic outlook as they unfolded”

From the BOE statement:

The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment.At its meeting ending on 1 February 2017, the Committee voted unanimously to maintain Bank Rate at 0.25%.The Committee voted unanimously to continue with the programme of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, totalling up to £10 billion.The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.

As the MPC had observed at the time of the UK’s referendum on membership of the EU, the appropriate path for monetary policy depends on the evolution of demand, potential supply, the exchange rate, and therefore inflation.The Committee’s latest economic projections are contained in the February Inflation Report.The MPC has increased its central expectation for growth in 2017 to 2.0% and expects growth of 1.6% in 2018 and 1.7% in 2019.The upgraded outlook over the forecast period reflects the fiscal stimulus announced in the Chancellor’s Autumn Statement, firmer momentum in global activity, higher global equity prices and more supportive credit conditions, particularly for households.Domestic demand has been stronger than expected over the past few months, and there have been relatively few signs of the slowdown in consumer spending that the Committee had anticipated following the referendum.Nevertheless, continued moderation in pay growth and higher import prices following sterling’s depreciation are likely to mean materially weaker household real income growth over the coming few years.As a consequence, real consumer spending is likely to slow.