Bank of England keeps its low rates amid ECB interest rate cuts

The European Central Bank lowered interest rates as the Bank of England kept its record low rate steady on low inflation and falling wages in Britain. The ECB decision comes soon after France and Germany showed disappointing GDP growth and the possibility of a recession. Italy also fell into its third recession in as many years.

Dovish monetary policy was expected from the ECB despite German resistance, as German politicians pressed for further austerity in peripheral nations. Germany has seen a growing current account surplus in recent years.

The European Central Bank lowered interest rates as the Bank of England kept its record low rate steady on low inflation and falling wages in Britain. The ECB decision comes soon after France and Germany showed disappointing GDP growth and the possibility of a recession. Italy also fell into its third recession in as many years.

Dovish monetary policy was expected from the ECB despite German resistance, as German politicians pressed for further austerity in peripheral nations. Germany has seen a growing current account surplus in recent years.

The Bank of England has left its record-low interest rate unchanged despite some expectations of a rate hike on a strong domestic housing market. The Monetary Policy Committee said inflation remained weak and there was a renewed case for stimulative policies.

Low British Inflation, Falling Wages

The United Kingdom has shown relatively strong momentum in 2014, which had led some analysts to expect a rate hike to come before the end of the year. The British economy has grown 0.8% for the past two quarters, better than any other Group of Seven economy and one of the best performers in the European Union.

Despite overall GDP growth, several other indicators suggested the rate of recovery was in fact quite weak. Wages have fallen in 2014 in the United Kingdom and consumer prices grew at an annualized 1.6% rate in July, below the 2% target set by the Bank of England. The decline in wages surprised economists, and was the first fall in incomes in the UK since 2009.

Bank of England Governor Mark Carney said that the UK’s economic condition did not justify a change to the bank’s key interest rate, which was remaining at 0.5%. The FTSE reversed an early morning decline to rise 0.3% on the news. Short and mid-term UK Gilts were mixed, with 2-year yields rising 7 basis points and 5 year yields falling 16 basis points. The 10-year yield fell 7 basis points to 2.47%, just 5 basis points higher than the U.S. 10-year Treasury.

Surprising ECB Policy

The European Central Bank announced that it would maintain its rate structure by cutting all interest rates on Thursday, with the deposit rate increasing its negative return. The deposit rate, which went negative for the first time in history earlier this year, was cut to -0.2%. The negative rate is designed to encourage more capital investment in other parts of the economy, through things like small business lending and mortgages.

At the same time, the ECB has cut its marginal rate to 0.3% and the benchmark interest rate has fallen to 0.05%, remaining barely positive.

The rate hike immediately caused bonds to rise throughout the eurozone while European stocks rose on the news. S&P 500 futures were also higher in pre-market trading.

German politicians have dissented with a looser monetary policy for some time. Earlier this week, German Finance Minister Wolfgang Schaeuble dismissed speculation of a European quantitative easing program, saying that the ECB lacked “the instruments to fight deflation.” Instead, Schaeuble said investments would grow naturally if confidence would rise.

Despite the divergence between ECB policies and German political will, the ECB will begin a full asset-purchasing program, which will begin in October of this year.

The Euro fell against the dollar on the news, reaching its lowest rate in a year. NYMEX Crude also fell.