BoE keeps rates on hold and options open - J.P. Morgan Asset Management
CLOSE

BoE keeps rates on hold and options open

The Bank of England (BoE) leaves monetary policy unchanged, increases UK growth for the year and will monitor rising inflation.

Key points:
  • As expected, the BoE kept interest rates on hold at 0.25%. The asset purchase programme also remains unchanged.
  • Significant increase to growth expectations: UK GDP is predicted to grow by 2.0% in 2017, up from last November’s forecast of 1.4%, which was itself an upgrade from the 0.8% forecast made in August 2016.
  • Specific concerns over inflation rising too quickly: The BoE anticipates inflation reaching 2.7% by the end of the year—well above its target rate of 2%. However, it will tolerate overshooting of the target to some degree given the massive fall in sterling.

Growth forecasts look strong and loose monetary policy has helped support growth after the EU referendum result. However, BoE Governor Mark Carney emphasised that once Article 50 is invoked and trade negotiations commence, the consumer will play an even more important role in carrying UK growth through these uncertain times

Consumption makes up 60% of UK GDP, and with recent small stumbles in retail sales and household borrowing, the UK consumer is firmly under the spotlight. If real wage growth softens too much, consumers may reduce their spending, leading to a drag on growth. On the other hand, Carney stated that if wage growth picks up faster than currently anticipated, the BoE would tighten monetary policy appropriately.

Another interesting point was the recalibration of “economic slack,” with the Bank stating that the unemployment rate could fall further before causing significant inflationary pressures.

Market reaction was mixed and muted: GBPUSD fell 0.8% after the announcement, down to USD 1.25. 10-year Gilt yields fell by 8 basis points. The FTSE 100 and FTSE All Share rallied slightly, both posting gains of less than 1%.

Investment implications

Markets had hoped for further clarity on monetary policy for 2017, but the BoE kept its options open, leaving room to either remain very supportive or become more hawkish towards the end of the year. While the UK’s interest rates remain very low, the possibility of a rate increase towards year-end has not entirely dissipated. Market expectations for an increase in BoE Rate this year decreased after today’s meeting, but with higher inflation and higher bond yields likely in the medium term, traditionally defensive sectors and “bond proxy” stocks appear less attractive in the UK stock market. In the near term, the weaker pound helps boost the FTSE 100 because of its large share of international revenues. Selectivity will be key for investors as we head towards Brexit negotiations, in which specific sectors and companies will face various challenges and opportunities.

Related products

JPM UK Equity Core Fund
The Mercantile Investment Trust plc

Important information

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields is not a reliable indicator of current and future results.

J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. This communication is issued in the United Kingdom by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority, Registered in England No. 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP.