Forex: What the BoE Decision on UK Interest Rates Means For GBP

Pound Vs Euro

The Bank of England kept its key interest rate at 0.5 percent at its final meeting of the year, it said Thursday while keeping an eye on Britain's Brexit-fuelled inflation.

By a vote of 9-0 the Monetary Policy Committee made a decision to hold Bank Rate at 0.50% and the size of its Asset Purchase Facility at £435bn.

In its assessment of the United Kingdom economy, the MPC said the rate of inflation - confirmed at 3.1% on Wednesday - was "close to its peak" as it had previously forecast.

BoE policymakers voted unanimously to keep rates at 0.5 percent, as expected, a month after raising them for the first time in more than a decade as inflation approached its highest level in almost six years. The measures announced in the Autumn Budget will lessen the drag on aggregate demand stemming from fiscal consolidation, relative to previous plans.

Unemployment was expected to remain low throughout the three-year forecast period, and domestic inflationary pressures were projected to pick up gradually as remaining spare capacity was absorbed and wage growth recovered. "We put this down to the emphasis that the market continues to place on the Brexit negotiation as the key variable in shaping United Kingdom rate expectations".

The BoE sat tight at the meeting on Wednesday after lifting the rate in November for the first time in a decade, from a record-low 0.25 percent, faced with high inflation that could see the central bank lift borrowing costs further in 2018, according to analysts.

GETTYThe pound is holding its ground against the euro this morning as markets await the EU summit vote
GETTYThe pound is holding its ground against the euro this morning as markets await the EU summit vote

CPI inflation was 3.1% in November.

The decision comes as British Prime Minister heads to Brussels for a summit of European Union leaders where she hopes to win approval for the Brexit talks to move onto trade matters following an agreement last week on citizens' rights, the Irish border and Britain's divorce payment.

In the minutes from its latest meeting, the MPC repeated its view that inflation was "likely to be close to its peak".

The bank noticed two significant events regarding the macroeconomic outlook since the November meeting. Meanwhile, the MPC sounded a little more optimistic on Brexit, noting that recent progress in negotiations have reduced the "likelihood of a disorderly exit". In such exceptional circumstances, the MPC's remit specifies that the Committee must balance any trade-off between the speed at which it intends to return inflation sustainably to the target and the support that monetary policy provides to jobs and activity. All nine members of the Monetary Policy Committee voted to keep rates unchanged.

That view was maintained in December, with the MPC saying that it "remains of the view that, were the economy to follow the path expected in the November Inflation Report, further modest increases in Bank Rate would be warranted over the next few years, in order to return inflation sustainably to the target".

"Any future increases in Bank Rate are expected to be at a gradual pace and to a limited extent", BoE says.

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