The Bank of England (BoE) was centre stage this week, with Thursday seeing the announcement of the latest interest rate decision for the UK. The result itself was relatively unsurprising. The BoE’s Monetary Policy Committee (MPC) voted by a 7-2 majority to keep base rate on hold at 0.5%, a result that had been foreseen with a probability of 87% immediately prior to the announcement.
It should not be lost, however, this position has shifted dramatically over the past couple of months. As recently as February the market assumed with a probability north of 80% that the May meeting would see a rate increase. Weak economic data published in the interim had driven this change in expectations, and it was duly cited as being a factor in the MPC’s rationale to hold with the BoE simultaneously cutting their 2018 growth forecast from 1.8% to 1.4%. At this stage, the lower projection is primarily a function of the weaker than anticipated preliminary estimate of first quarter growth, which the MPC attributed largely to the “Beast from the East”. While this soft patch is viewed as temporary, and seen as having few implications on the outlook for the UK economy, it did provide enough uncertainty for the Committee to wait and see how the data unfolds over the coming months.
This stance leaves the door open for the BoE to move on rates later in the year. However, Sterling continued its recent decline post the announcement, with the currency dropping more than 1% against the US Dollar on the news. On Thursday afternoon the Pound traded sub-$1.35, a year-to-date low, having fallen close to 6% since Mark Carney (Governor of the BoE) first began hinting at a cooler attitude to rate increases in mid-April.
Sterling was not the only thing on the move this week. Oil traded higher, with Brent up 3.5% for the week (to $77.50) at the time of writing. Behind the rise, was President Trump’s announcement that the US would withdraw from the Iran nuclear deal, while re-imposing wide-ranging sanctions against Tehran. Equity indices shrugged off the news, continuing to grind higher over the week, despite the impact on European corporates remaining unclear. Leaders in the EU have been discussing the potential for exemptions, though convincing European companies to continue signing deals with Iran in the interim may prove difficult. Further volatility driven by geopolitical issues may well lie ahead.