Base Rate  

Bank of England holds interest rates at 0.5%

Bank of England holds interest rates at 0.5%

The Bank of England has revised sharply downwards its forecast for UK GDP growth for 2018, and left interest rates unchanged at 0.5 per cent.

The central bank said it expects the UK economy to grow by 1.4 per cent this year, down from the previous level of 1.8 per cent.

This brings it into line with the estimate of the Office for Budget Responsibility (OBR), which believes the economy will grow by 1.5 per cent this year.

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Fund manager Neil Woodford is among those who think the official forecasts are too pessimistic, he said the UK could grow by 2 per cent this year.

The decision to leave interest rates unchanged was widely expected.

In March the market was pricing in an 85 per cent chance of rates going up this month, but several recent economic data points, including much worse than expected Purchasing Managers Index (PMI) data in the manufacturing and service areas of the economy led to a sharp revision in market expectations.

The UK economy grew by just 0.1 per cent in the first three months of 2018.

The GDP growth rate in the US and Europe also slowed materially in the first quarter of the year.

The Bank of England's Monetary Policy Committee (MPC) voted seven to two to keep rates unchanged.

The two members of the nine person group to vote in favour of a rate rise were Michael Saunders and Ian McCafferty. They have consistently advocated rate rises in recent months.

Mr McCafferty is due to leave the committee later this year.

Mark Nash, head of fixed income at Old Mutual Global Investors, said the market has started to expect lower interest rates for a longer period of time. He said this may be misguided as inflation continues in the system and fears of deflation are a distant memory.

Ben Brettell, senior economist at Hargreaves Lansdown, said the decision to leave the base rate at 0.5 per cent barely caused a ripple in the markets.

He said: "Sterling lost around half a cent against the dollar, but the real damage had been done in the weeks leading up to today, with the pound almost eight cents weaker than four weeks ago. The FTSE 100 gained a few points on the news.

"The minutes were a fairly uninspiring read, with the Bank noting its forecasts hadn’t changed much since they were last updated in February. Wage growth and domestic cost pressures were only getting gradually firmer, and don't justify higher rates at present.

"Personally I think we might not see a rate rise for the rest of the year. But while savers will be disappointed, it is pretty good news for investors.

"Stock markets don't tend to like rising interest rates much, so an environment where rates rise only gradually should be supportive for the UK stock market."

In his press conference after the rates decision was announced, Bank of England governor Mark Carney said the fundamentals of the UK economy have not particularly changed in recent months and he expects the recent slowdown in the pace of growth to be temporary,