Bank of England Keeps Base Rate Unchanged at 0.50%

Key points: Bank of England kept its benchmark rate unchanged at 0.50% today amid weak economic growth and bleak economic outlook

The Bank of England kept the base rate (at 0.50%) as well as the asset purchase target (at GBP200bn) unchanged, as expected by almost all forecasters in the market, including us. The decision should not come as a surprise as economic data have been very disappointing lately, but with CPI still being twice as high as the BoE's 2% target, some current and former MPC members taking a hawkish stance and the May Inflation Report being released next week, one could not be 100% sure of the outcome. After all, a 25bp hike was fully priced some two months ago and one could argue that rates at emergency levels are not required anymore even though the economy is flat lining rather than expanding at a healthy pace as should be expected after a deep recession and subsequent monetary stimulus.

We will have to wait until 18 May for the Minutes to see the exact voting result in the monetary policy committee (MPC), but we dare already say now that the colourful über-hawk, Andrew Sentance, who will leave the committee by the end of next month, probably stuck to his call for a 50bp hike. His successor, former Goldman Sachs economist Ben Broadbent, will most likely be less aggressive when he joins the committee in June and will start out by voting for unchanged rates.

Martin Weale, who has been voting for rate hikes since January, recently indicated that he may vote for rates to be left on hold in the wake of the latest poor data and we think BoE's Chief Economist, Spencer Dale, has the same considerations. In sum, this means that the current 6-3 voting result for unchanged rates can easily grow to a 7-2 or a 8-1 - perhaps even unanimous during autumn if everyone draws in their horns as inflation moderates.

The Governor recently nailed his dovish stance further by saying that high debt levels pose “massive” economic challenges that would be exacerbated by higher long-term interest rates and that “the economic consequences would become more severe if rates were to rise”. This effectively means that rates can never rise to previous levels again.

The UK yield curve is currently very flat in the front end with the first 25bp hike not priced before December and the next in May 2012. Taking into account the recent weak data and the bleak outlook, we think this makes sense by now. One could however argue that the Bank of England should wait for the economic upswing to return before raising rates - this means February 2012 at the earliest for the first hike.