Bank of England raises prospect of pause in rate cuts as uncertainty mounts
By William Schomberg and Suban Abdulla
LONDON (Reuters) - The Bank of England kept interest rates on hold and warned investors against assuming they would be cut quickly as it grappled with deep uncertainty hanging over the British and world economies.
The BoE's rate setters voted 8-1 to keep borrowing costs at 4.5%, with only external member Swati Dhingra voting for a quarter-point cut. Economists polled by Reuters had mostly forecast a less emphatic 7-2 'hold' vote.
Governor Andrew Bailey, echoing other central bankers around the world, highlighted the sudden lack of visibility about the outlook due largely to the rise in trade tensions kicked off by the United States under President Donald Trump.
The UK economy is also at risk of higher inflation as a tax hike for employers kicks in next month.
Bailey said the BoE would have to move carefully with its next rate cuts because inflation pressures remained a risk.
"We need to accumulate the evidence" of a fall in price pressures, Bailey told broadcasters. "We really do have to wait to see that evidence unfold."
With UK inflation stuck firmly above its 2% target - it hit 3% in January - the BoE has cut borrowing costs by less than the European Central Bank and the U.S. Federal Reserve since last summer, contributing to Britain's sluggish economic growth.
The Monetary Policy Committee's next scheduled rates announcement is on May 8, by which time it will know whether Trump has gone through with his threat to hit a swathe of U.S. imports with new tariffs.
After its announcement on Thursday, investors saw a less than 50% chance of the BoE cutting rates in May and 44 basis points of rate cuts - less than two quarter-point moves - this year, down from over 50 basis points earlier in the day.
The MPC said "there was no presumption that monetary policy was on a pre-set path over the next few meetings", although it still expected inflation pressures would continue to ease.
Sterling rose by almost a fifth of a cent against the U.S. dollar immediately after the announcement before giving up some of that gain. British two-year government bond yields, which are sensitive to speculation about rates, reversed course and were up by almost six basis points on the day at 1610 GMT.
Analysts picked up on the message of caution from the central bank.
Paul Dales, chief UK economist at Capital Economics, said there could now be an early pause in the BoE's pattern of cutting rates once every three months since last August.
"We’ve assumed that happens in August, but May is clearly a possibility," he said. "The key point, though, is that we think the weak economy will mean inflation doesn’t stay higher for longer and that the Bank will resume cutting rates in November and will still lower them to 3.50% next year."
