UK rates “lower for longer”

The Bank of England has unanimously voted to hold the base rate at 0.25% and maintain quantitative easing at current levels.

UK rates “lower for longer”

The Monetary Policy Committee said the decision reflects the likelihood of slower household income growth which would weaken consumer spending next year.

“The Bank of England was not expected to change policy at this meeting, and their statement suggests that the balance of arguments favours keeping policy unchanged for the foreseeable future,” said Ian Kernohan, economist at Royal London Asset Management.

“They note that the forward-looking components of business surveys are weaker than those for current output levels, suggesting a slowdown in 2017. Also, with trade weighted sterling moving higher since their last meeting, this would result in a slightly lower path for inflation than they had envisaged.

“The MPC will remain sensitive to any slowdown in economic activity next year, with real income growth squeezed by rising inflation and Brexit uncertainty impacting corporate investment plans.

“In my view, the balance of probability still favours another small rate reduction next year, and with the Fed hiking rates, this will continue to put downward pressure on sterling against the dollar.”

Tom Stevenson, investment director for personal investing at Fidelity International, also believes the MPC will take a lower for longer approach to rates.

“Even with Tuesday’s CPI figures showing that inflation has risen above expectation and is set to breach the 2% target next year, the MPC has indicated that it is keen to keep rates at current levels for the foreseeable future to support growth through the initial phase of the Brexit negotiations.

“This means that the lower for longer environment remains in force on this side of the Atlantic and that continues to make the case for higher-yielding bonds and equities.”

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