What's going on?
The Bank of England (BoE) followed its US counterpart in keeping the UK’s interest rates unchanged on Thursday. But despite lowering its economic growth forecast, it may still increase rates later this year.
What does this mean?
The UK’s central bank now think the country’s economy won’t grow at all this quarter; back in March, it was predicting 0.2% growth compared to the first quarter of 2019. A still-uncertain path out of the European Union is partly to blame: British businesses stockpiling products ahead of a now-delayed Brexit has led to a dearth of new orders for manufacturers as companies chow through their existing stashes.
But workers’ wages are rising faster than the prices of goods and services, which were themselves rising faster than the central bank’s target – although inflation has now cooled down and is expected to stay chilled. That may have persuaded the BoE to hold off rate increases for now – but in the event of a smooth Brexit, gradual rate hikes remain on the cards.
Why should I care?
For markets: Higher-minded.
In remaining open to higher interest rates, the UK’s skirting the battle brewing between the US, China, and the eurozone – each of which are looking to lower their rates (and perhaps end up with a cheaper currency, attractive to foreign buyers of their wares). The pound’s value fluctuated on Thursday as investors weighed potential higher rates to come against a lower economic growth forecast. But investors gobbled up Norwegian kroner after the country’s central bank announced its third rate hike in a year.
The bigger picture: From macro to micro.
Data out on Thursday showed that recent European retail sales weakness washed up on British shores in May – supporting the BoE’s lowered growth forecast. One victim of the slowdown is electronics retailer Dixons Carphone, which on Thursday warned that less frequent consumer smartphone upgrades would weigh on its annual earnings – leading investors to dial its shares down 5%.