What's going on?
The Bank of England (BoE) struck a cautious tone on Thursday as it lowered its growth expectations for both the UK economy and inflation in 2018.
What does this mean?
As recently as a month ago, investors were primed for an interest rate hike this week. But cautious comments from the central bank coupled with economic data suggesting the UK’s growth wasn’t rocking and rolling as hoped (the government blames the “Beast from the East”, although the BoE disagrees) did their work.
By Thursday, investors had all but given up on an increase. And the BoE obliged, keeping interest rates at 0.5% while saying it expects the UK economy to grow by 1.4% in 2018 – down from February’s forecast of 1.8%.
Why should I care?
For markets: The BoE is looking for signs of a recovery in the UK economy.
The Bank blames a slow first quarter for the lower growth estimate, and wants to see more before increasing rates further – perhaps suggesting a more gradual upwards path than previously expected, as in the US. The pound’s plunge in the wake of the Brexit vote made UK goods cheaper abroad – likely increasing demand – and made UK imports more expensive, causing higher prices at home. A strong pound this year has helped reverse that effect, leading price rises to slow more quickly than expected – and the BoE to lower its inflation expectations for the year.
For you personally: There’s more to interest than money in the bank.
In addition to paying you more on your savings, rising interest rates are typically a good thing because they signal strong economic growth. When demand for products rises as companies and people have more money to spend, it can drive a virtuous cycle – consumers spend more with companies which produce said in-demand products, and those companies turn profits that they can spend on things like new products and hires.