Strong pound, weak oil delay interest rate rise

Ben Brettell, Senior Economist, Hargreaves Lansdown: “The Bank of England’s capacity to surprise markets remains intact. Analysts had fully expected the Monetary Policy Committee to be split 7:2 in favour of leaving interest rates on hold this time around – as such the 8:1 verdict came as a shock, with Ian McCafferty the lone voice calling for a hike. The minutes revealed concerns that the strength of the pound and recent further falls in the oil price would mean inflation increasing more slowly than previously thought.”

“Sterling immediately weakened on the news, as expectations for the timing of the first interest rate rise were pushed back. Meanwhile the FTSE 100 jumped. Speculation had been intensifying that the Bank would swiftly follow the US Federal Reserve, which appears set to raise rates in September.”

“It will take some time for more MPC members to be persuaded higher rates are appropriate, in my view until spring next year at the earliest. Thereafter the path of rate rises is likely to be a slow incline, and it wouldn’t surprise me to see them stuck on 0.75% for some time.”

“The Bank’s rhetoric had been increasingly hawkish of late (i.e. favouring higher interest rates). There appears to be some desire to simply get the first rise out of the way, if only to give the Bank some ammunition in the event of a future downturn. If rates remain at rock bottom throughout this business cycle, when the economy next slows (as it inevitably will at some stage), the Bank’s options will be limited to more quantitative easing.”