The FTSE 100 dipped 0.3 per cent following the Monetary Policy Committee’s lunchtime decision to keep the Bank of England base rate at 0.25 per cent, despite expectations that inflation will breach its 2 per cent target over the summer.
Expecting household spending to slow in the face of weak real wage growth, the MPC is committed to its plan for monetary policy, which looks set to case pain for cash savers.
The minutes following today’s meeting pointed to three key factors indicating the state of the economy.
A weaker pound would boost inflation in line with expectations, wage growth was “notably softer than expected”, and household spending was set to slow as on aggregate, consumer demand had been “mixed”.
Low consumption growth was being offset by an improving net trade position and a weak pound was benefiting exporters, lifting sentiment and in turn encouraging business investment.
The MPC says: “Reflecting the mixed indicators, the expectation that activity would slow in line with the February forecast over the next few quarters was held with differing degrees of confidence across the Committee.”
Hargreaves Lansdown senior analyst Laith Khalaf warns case savers are in for touch time in the short term.
He says: “Inflation may be starting to rise, but interest rates are staying put for the foreseeable future, which is going to cause further pain for cash savers.
“Households face a currency crunch this year, as weaker sterling feeds through into consumer prices, pushing up the cost of living, while pay growth still looks anaemic.”
Axa Investment Managers senior economist David Page shares the MPC’s uncertainty over exports while holding the view that the economy will slow sufficiently for the MPC to maintain its stance over the coming quarters.
He adds: “We also find it difficult to envisage the MPC tightening monetary policy around the turn of 2018/19 as inferred from the conditioning assumption in February’s Inflation Report.
“This would likely be around the culmination of Brexit negotiations and just before the UK leaves the EU.
“As such, we continue to forecast monetary policy unchanged into 2019. However, we do recognise a risk that growth surprises to the upside over the coming quarters, which could lead additional MPC members into voting for tighter policy.”
Royal London Asset Management economist Ian Kernohan says: “A reduction in the equilibrium unemployment rate, supported by a softening in wage pressures in the latest Labour Market Report, suggests interest rates will remain on hold for now.
“The dissenting vote by Kristin Forbes will have come as a surprise to some, although she is a well-known hawk on the committee, who will be leaving this summer.”
Against the mildly more hawkish tone of the meeting, two-year gilt yields jumped 6 basis points to 0.11 per cent, while 10-year gilt yields were up 8bps to 1.29 per cent.
Sterling was up 0.9 per cent against the dollar to a 15-day high, and 0.8 per cent to the euro.