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Bank of England holds rates, signals hike

Staff Writer |
The Bank of England retained its interest rate at a record low in a split vote and trimmed the growth outlook, as it expects the Brexit uncertainty to hurt economic activity in coming months.

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The bank also hinted that the key rate could be raised next year.

The Monetary Policy Committee, headed by Governor Mark Carney, voted 6-2 to hold the interest rate at a historic low of 0.25%.

Only Ian McCafferty and Michael Saunders voted for increase this time as Kristin Forbes, who sought a rate hike at the previous meetings, left the MPC and was replaced with Silvana Tenreyro.

"If the economy were to follow a path broadly consistent with the August central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the path implied by the yield curve underlying the August projections," the bank said.

Policymakers agreed that any increases in the interest rate would be expected to be at a gradual pace and to a limited extent.

All eight members of the MPC voted to maintain the quantitative easing at GBP 435 billion. The committee also unanimously decided to close the drawdown period for the Term Funding Scheme, as originally envisaged.

In the Inflation Report, the bank said growth is slightly weaker than projected in May in the near term but similar further out.

The bank downgraded its growth projection for this year to 1.7% from 1.9% and that for 2018 to 1.6% from 1.7%. The outlook for 2019 was maintained at 1.8%.

GDP growth is forecast to remain at 0.3% in the third quarter of 2017, before picking up slightly at the end of the year.

During the press conference, Governor Carney warned that the uncertainty over the UK's exit from the EU is weighing on the economy. The latest projections are based on a "smooth" transition, he said.

Inflation is expected to remain around 2.75% until early next year. The bank expects inflation to peak at about 3% in October.

The bank said inflation will be 2.7% in the third quarter of this year, instead of 2.6% projected in May.

The inflation outlook during the third quarter 2018 was kept unchanged at 2.6%.

Average earnings are forecast to grow 2% this year, unchanged from the prior projection. But the outlook for 2018 was lowered to 3% from 3.5%.

James Smith, an economist at ING Bank, said with wage growth likely to stay below 2% for much of this year, and businesses likely to remain cautious on investment, BoE is unlikely to actually follow through with their hawkish signals and hike rates this year.

The hawks will remain in a minority for a while longer yet, Paul Hollingsworth, Capital Economics' economist, said. The first hike will come in May next year alongside the Inflation Report, he added.

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