United Kingdom Monetary Policy

United Kingdom

United Kingdom: Bank of England keeps Bank Rate on hold

October 22, 2014

At its 7-8 October meeting, the Monetary Policy Committee (MPC) of the Bank of England (BoE) decided to keep the Bank Rate unchanged at 0.50% and leave the stock of asset purchasing at GBP 375 billion. Two members of the nine-member Committee voted in favor of raising the Bank Rate by 25 basis points, while the latter decision was taken unanimously. This is the third consecutive meeting since July 2011 in which there has been a divergence among the MPC members about the Bank Rate action. The Bank continued to see the rate as appropriate considering the current state of the economy and the outlook for the coming months.

Regarding the domestic economy, the Committee commented that economic activity had continued to grow at a pace slightly lower than its long-term average. Signs of a loss in momentum were more pronounced in indicators such as house prices and surveys of business expectations. However, this slowdown is consistent with the Bank’s expectations. The amount of slack in the economy has been falling as the unemployment rate continues to decrease. However, there is still uncertainty about the actual amount of slack as well as the rate at which it is being used up.

Regarding consumer prices, MPC said that the unexpected fall in the inflation rate in September is, “consistent with currently weak price pressures: wage growth remained low; unit labour costs had fallen; and import prices were falling, driven by lower commodity prices, weak global inflation, and the higher level of sterling.” The seven members who voted in favor of keeping the Bank Rate unchanged did not see sufficient evidence of prospective inflationary pressures to justify an increase of the rate. However, for the other two members, the current economic circumstances and the fact that monetary policy could be expected to operate with a lag were sufficient to justify an increase in the rate.

The Bank of England acknowledged that financial market prices suggest expectations of a 25 basis point increase in the Bank Rate in July 2015, two months later than had been announced at the previous meeting. The Consensus Forecast indicates that the first Bank Rate hike will likely occur in the early months of 2015. Within this setting, the all of FocusEconomics Consensus Forecast panelists expect the BoE to leave interest rates unchanged at 0.50% this year. For next year, the panel expects the Bank Rate to end the year at 1.33%.

Author:, Senior Economist

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United Kingdom Monetary Policy Chart

United Kingdom Monetary Policy October 2014

Note: Asset Purchase Facility (APF) in GBP billion and Bank Rate in %.
Source: Bank of England (BoE).

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