Bank of England holds rates as expected

As expected on Thursday, the Bank of England announced it held its benchmark interest rate unchanged at a record low 0.5% and also kept its asset purchase program at £375 billion. The decision was made by the Bank’s Monetary Policy Committee (MPC) at the April 9 meeting and no statement was released after the policy announcement.

The BoE’s decision to maintain policy was mostly expected by the markets because the UK economy has shown signs of steady growth this year so far. The UK economy grew by a robust 0.6% in the final three months of the year, and this rate of expansion looks to have been at least matched, if not bettered, in the first quarter of 2015. Recent PMI data are pointing to GDP having risen 0.7% in the three months to March, with growth having accelerated at the end of the quarter. Such a robust pace of expansion indicates that the economy should be able to withstand modest and gradual interest rate rises.

The extremely low inflation rate means policymakers are likely to be in no rush to raise rates. The majority of the MPC are likely to prefer to leave policy as accommodative as possible. Headline inflation fell to zero in February, a record low, and looks set to fall further in coming months due to low energy prices and intense price competition among supermarkets.

There’s some uncertainty about the medium-term outlook for inflation, on which current policy is largely based, with the recent fall in oil prices set to fall out of the year-on-year comparisons and therefore putting upward pressure on the inflation rate.

The Bank’s MPC are also likely to refrain from raising rates too soon due to heightened political and economic uncertainty resulting from the UK elections in May.

Sterling rose immediately after the policy announcement to a high of $1.4844 but subsequently fell to 1.4693 by late US session trading on Thursday due to the broadly stronger greenback.

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