The Bank of England looks set to leave interest rates unchanged yesterday, after surprisingly weak data and cautious remarks from Governor Mark Carney dashed expectations of what until a few weeks ago looked a near-certain increase.
Sterling has tumbled in recent weeks from its post-Brexit vote highs of close to $1.44 to $1.35, erasing its gains against the dollar for the year as investors unwound bets on a rate increase and British economic data came in worse than expected.
The Monetary Policy Committee (MPC) voted 7-2 to keep rates at 0.5% following the shock slowdown in growth to 0.1% in the first quarter (Q1) as the impact of the Beast from the East compounded woes in consumer and construction sectors.
Accordingly, the Bank has trimmed its full year growth forecast (issued in February) down from 1.8% to 1.4%.
Bank of England governor Mark Carney said the "underlying pace of growth remains more resilient than the headline data suggests". The bank expects the first quarter growth to be revised up to 0.3% from the initial estimate of 0.1%.
The BoE said it expected Britain´s economy would grow by 1.4 percent this year, down from the 1.8 percent rate it predicted in February, which was a bit above what most economists thought likely at the time.
"An ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target at a conventional horizon", the BOE said.
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"Cable broke below $1.35 and that filtered through to weakness against the euro", said Lee Hardman, FX strategist at MUFG.
Last month, markets were pricing in a 90% chance of a May rate rise, before data from the ONS showed that GDP growth fell by 0.3 percentage points in the first quarter of 2018.
James Smith, an economist at ING, said: "As the Bank of England points to a possible rebound in economic growth and further wage rises, we think markets may have been too quick to write off a near-term rate hike".
"Timing of the next BoE rate hike remains highly data dependent and we see market pricing as fair for now, with risks skewed to the upside for United Kingdom yields in the coming months, if we are right in our call that the BoE will hike the Bank Rate in August". Carney has been labeled an "unreliable boyfriend", having already in the past flagged up a rate hike only to back out later.
The second reason the central bank opted against another rate increase is that inflation has fallen more than anticipated.
"It looks like the 2018 rate hike has been delayed not cancelled", Fitch Ratings chief economist Brian Coulton said.
"With inflation falling fast, and the Bank predicting it could soon be falling faster, the inflationary imperative for a rate rise has all but gone", added Lamb.
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