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Bank is foolish not to raise 0.5% interest rate, says economist

The Bank of England's monetary policy committee will nearly certainly announce no change in United Kingdom interest rates and no change in its asset-purchase program today but traders in GBP will need to listen carefully when Bank Governor Mark Carney explains the decision and take a close look at the Bank's quarterly Inflation Report.

The pound was hit by the Bank's downbeat assessment of the United Kingdom economy - revealed in the quarterly inflation report it published alongside its rates decision today - which implies that a rate rise in the coming months is unlikely.

The bank said recent reports of sluggish economic activity were enough to convince the majority of MPC members to keep rates on hold.

As recently as February economists were expecting the Bank to raise interest rates this month.

David Whittaker, CEO of Mortgages for Business, said: "Like many market commentators we are not surprised that the MPC chose not to raise Bank Rate this month".

New Zealand central bank Governor Adrian Orr said in an interview on Thursday that the bank wants to see wages rise and start to drive up prices before it increases interest rates from a record low.

In recent months, the prospect of an interest rate rise by the Monetary Policy Committee (MPC) has been considered an nearly sure thing. Their forecasts for the year were reduced principally to take into account the lower than expected performance that has already been and gone - growth predictions for subsequent years remain unchanged.

Governor Mark Carney said the Bank believed the "underlying pace of growth remains more resilient than the headline data suggest". We expect an acknowledgement from Carney that economic conditions have worsened since the last meeting in March, while there is a good chance that we'll see a downward revision in the 2018 growth forecast, although this may be largely priced in. They no longer price in a full 25 basis point rate rise in December, according to Reuters data.

Sterling dropped 0.3 percent to $1.3505 as of 12:15 London, after earlier climbing as much as 0.5 percent.

"An ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target at a conventional horizon", the BOE said.

The minutes from the meeting show the MPC wants to wait and see how the economy performs over the coming months.

The Bank's forecasts are based on financial market expectations for three rates rises by the end of 2020 to bring inflation back to the 2% target.

And there are fears that the first-quarter slowdown may not just be a weather-related blip, with official data revealing more widespread weakness and survey data for April showing little sign of a bounce-back. U.S. stocks meanwhile pushed further higher as the soft inflation reading lowered the prospects of three further Fed rate increases this year.

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