MPC holds fast on interest rates

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Despite previous expectations for a rate rise in May, “Super Thursday” saw no change in monetary policy from the Bank of England. The Monetary Policy Committee (MPC) voted 7-2 to leave the Bank Rate at 0.5%.

This decision followed a series of economic indicators that had been softer than expected, such as the preliminary estimate for Q1 GDP growth (0.1% q/q). As a result, the majority of the MPC agreed to keep rates on hold this month to see whether the weakness in Q1 proved to be temporary, as they expect, or more persistent. However, the Committee’s guidance on the future path of rate rises remained unchanged: an ongoing tightening in monetary policy would be necessary to return inflation to target, assuming that the economy evolved in line with the MPC’s forecast.

Labour market data continued to show a solid rise in employment in Q1, with the unemployment rate staying at its lowest (4.2%) since the mid-1970s. This positive news came alongside a further slight rise in real pay, with nominal pay growth (excl. bonuses) edging higher and inflation having fallen back over the same period. That said, pay growth remains well below its historical norms.

The ONS’ “flash” estimate for labour productivity pointed to a fall in output per hour of 0.5% q/q in Q1 2018. This decrease reflected an increase in total hours worked in Q1 (0.6%) alongside the weak growth in gross value added during the quarter (0.1%). The drop in productivity for Q1 follows a 0.7% increase in the previous quarter.