BoE benchmark rate has been speculated long before Fed rate. Yet, there hasn't been any significant measure taken to this day.

BoE (Bank of England) benchmark rate has been speculated long before Fed rate. Yet, there hasn't been any significant measure taken to this day. Since March 2009, BoE has been holding insterest rates steady at 0.5%. If we look deeper into UK fundamental outlook, there are signs indicating BoE may want to leave rates at the current level.

Bank of England


Economy Growth Nears Flat

In the last five years, compared with other advanced countries, UK economy could be considered as having steady growth and continually declining unemployment rate. Unemployment rates gradually decline from time to time both in the UK and US. But, while US GDP has been fluctuating like a see-saw, the same indicator from UK showed an almost flat progress. In other words, UK economy is neither sluggish nor actively growing.

In this situation, rate hike will risk domestic growth even if it's not going to negatively impact the job market. US central bank probably has the momentum to increase rates, but BoE  can't take any chance, knowing that it will threaten their country's economy growth. If we take those 2 fundamental indicators into account, the best decision for BoE will be: keep interest rates steady at low level of 0.5%.


Inflation Forecast And Global Slowdown Risks

It has been frequently mentioned that cheap oil brings concerns over low inflation, mainly due to oil's role as the vital energy source for many life aspects. Furthermore, global economy slowdown has weakened demands and pushed down commodity prices. Consequently, inflation outlook for many countries, including UK, has been cut down.

BoE members mentioned in their last MPC meeting, that inflation was projected to weaken, and global slowdown would drag UK economy and restrain its growth. Here, we can conclude that inflation can't be made as the one and only reason for BoE to increase rates.  In fact, BoE should watch out for global volatility and anticipate downside risks by keeping its interest rates at the current level.

Anyhow, there is still one component left that is regularly dubbed as the driving factor capable of pushing BoE to change their policy: housing sector. The escalating house price grows concern over low rate's possibility to cause housing bubble. The latest case of housing bubble happened in the US and triggered the global financial crisis of 2008/2009. Nevertheless, changing rates is not the sole solution for this. BoE can still regulate the housing sector with other policies to solve this problem. Seeing that rate hike can cost economy growth, increasing rates is more unlikely to be carried out by BoE.


Scotland Out, Britain Exit

After last year's referendum to vote for Scotland independence, UK plans to hold another one to give a chance for the people, to decide the country's membership in European Union (EU). The term Brexit, short for Britain Exit, has been established to describe UK's possibility to step out from the politico-economic union.

David Cameron had included Brexit referendum as one of his campaigns' agenda in the last May's election. He pledged to arrange the referendum no later than 2017. Here, the problem lays on investors' tendecy to worry over political issues, just like what happened in the event of Scotland referendum last year.

Although UK is not a Eurozone country (a country that uses Euro as currency), but it has received a lot of financial advantages after joining the EU. Exiting the union will impact, more or less, their economy condition. It means that there will be high risk ahead for BoE's plan to change policy, if they do it before the referendum.


Bottom Line

BoE Governor Mark Carney confirmed in his recent speech that so far, Brexit referendum plan holds no influence to economy condition. He also affirmed that EU doesn't affect much of BoE's decision-making.

The statement obviously gave a positive support to Poundsterling in short-term. At least, Pound traders can temporarily brush off Brexit issue in their fundamental analysis. Yet, it doesn't change the fact that BoE's interest rates are better if maintained at low level until the referendum is held. Regardless of any rumor concerning BoE's interest rates, there are no urgency for the central bank to start raising rates in the near future.