Bank Of England Holds Fire

Bank of England kept rates unchanged

Image source: Anthony Shaw Photography, Sunflowerr, Stephen Plaster - Shutterstock

What's going on?

On Thursday, the Bank of England (BoE) announced it’d keep UK interest rates stable at 0.75%.

What does this mean?

Recent economic data in the UK has been mixed. On the one hand, growth has been weak – the economy shrank in December, and according to the BoE, business investment is 14% lower thanks to the specter of Brexit. Lower spending and consumer confidence could make fresh economic contraction a self-fulfilling prophecy.

On the other hand, recent manufacturing data has improved (albeit partly thanks to factories stockpiling goods) and unemployment has fallen to all-time lows, which could presage rising business activity and economic growth. That said, the BoE believes short-term data is currently less reliable than usual thanks to Brexit-related disruption.

Why should I care?

For markets: A fork in the road.

The Bank believes interest rates’ next move could be up – or down. In the event of an orderly British withdrawal from the European Union, the fact workers’ wages are continuing to grow faster than product prices (a.k.a. inflation) could cause those prices to shoot up in response to greater demand. The BoE would then likely increase rates to bring inflation under control – diverging from its American and European counterparts, which aren’t planning to raise their rates at all in 2019 for fear of handicapping economic growth. In the event of a no-deal Brexit rout, however – which now looks a lot likelier than a week ago – spending could head south, causing the BoE to lower rates to support the economy.

The bigger picture: The British economy is carrying on.

Data released on Thursday showed UK retail sales increased 0.4% between January and February – confounding economists’ expectations of a decline, and perhaps suggesting those wage increases were spent rather than saved. The government’s own bank account looks healthier too: in February, the amount it borrowed was lower than a year before – giving the UK some room to respond to any future economic lurches.

Originally posted as part of the Finimize daily email.

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