What's going on?
The Bank of England (BoE) said on Thursday that the UK economy might’ve dodged a bullet for now, but it’s still way too early to think about increasing interest rates.
What does this mean?
Higher interest rates would make borrowing money more expensive, which would probably discourage businesses and consumers from spending, which would in turn limit economic growth. The BoE even acknowledged that the economic shrinkage it had forecasted this year probably won’t be as bad as it thought, and that’s partly down to easy access to cheap money. So it’s taking the “if it ain’t broke” approach, and won’t raise rates until the price of goods and services (a.k.a. inflation) begins to pick up.
Of course, the specter of Brexit is still looming large. And seeing as its economic effects are likely to be negative, the Bank has said cutting the country’s interest rates – even into negative territory – is still an option if need be.
Why should I care?
For markets: Enjoy it while you can…
Survey data out this week showed activity in the UK’s services industry – which drives the vast majority of the country’s economy – dramatically improved last month, and by some estimates even implied the British economy grew by 8%. That might’ve been why investors bought up the British pound this week. They probably weren’t short on willing sellers either: Bank of America’s latest forecast said the BoE will be forced to cut rates later this year in response to a still-weak economy and the threat of a no-deal Brexit.
Zooming out: Je ne regrette rien.
The BoE didn’t increase its $26 billion corporate bond-buying program on Thursday, but some climate-focused investors haven’t forgotten about it. They’ve pointed out that it helps sectors like energy and manufacturing, which are expected to drive temperatures above the Paris Agreement’s defined levels. And while the BoE’s independent from the UK government, some argue their climate goals should be better aligned.