The Bank of England has voted 6-2 to kept interest rates on hold at 0.25 per cent. Its accompanying quarterly Inflation Report downgraded the forecast for UK economic growth from 1.9 per cent to 1.7 per cent in 2017, due to weak GDP growth in the first half of this year.
Following the bank’s announcement, sterling dropped almost 1 per cent against the US dollar to $1.31. The Inflation Report points out that sterling has remained around 15–20 per cent below its November 2015 peak since the EU referendum.
Wage growth was also revised down by the bank. It is now expecting wages to contract this year by 0.5 per cent on an inflation-adjusted basis.
The weakness of the pound since the Brexit vote has helped to propel the FTSE 100 to its highest levels, and today’s move sent the index to its highest level since 26th July. But it seems sterling is set to stay weak for longer, given ongoing concerns around Brexit combined with questions about wage growth – while inflation is rising and wages stagnate.
Jeremy Roberts, head of UK retail at BlackRock, says: ‘Tomorrow marks the one-year anniversary of UK interest rates being cut to a record low of 0.25 per cent, and one year on we appear to be no closer to seeing an increase in the base rate.’
He points out that savers have not only seen little to zero gains on their cash, but also an uptick in inflation, which hit a four-year high of 2.9 per cent in May and is expected to peak to 3 per cent in October.
Martin Palmer, head of corporate market management at Zurich, comments: ‘Despite edging closer towards a rate hike at end of the year, the sidestep today means a continuation of the record lows that have driven borrowing and supported mortgage repayments.
‘On the flip side, it means less return on savings at a time when inflation has been on an upward trend, so while some people may be starting to build up cash reserves, these will lose more and more value in real terms as time goes on.’
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