United Kingdom: Bank of England keeps Bank Rate unchanged
September 4, 2014
At its 3-4 September meeting, the Monetary Policy Committee (MPC) of the Bank of England (BoE) decided to keep the Bank Rate unchanged at 0.50% and left 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 second time 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 expects a moderation in activity growth in Q4. Although data from the third quarter point to a continuation of strong economic activity, there were early signs from surveys of business expectations, housing market, exports and manufacturing that the rate of growth might ease in the fourth quarter. According to the Bank, the spare capacity is the labor market has not been completely absorbed yet. However, most members of the Committee pointed out that the degree of slack in the economy, “had diminished sufficiently that the uncertainty about its level made it a somewhat less informative guide to the appropriate future path of the monetary policy.”
Regarding consumer prices, MPC said that the unexpected increase in the inflation rate in June reflected a change in the timing of the summer sales for clothing and footwear. In fact, CPI inflation decreased in July and August. The seven members who voted in favor of keeping the Bank Rate unchanged did not see sufficient evidence of prospective inflationary pressure 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 are sufficient to justify an increase in the rate. Looking forward, the Bank expects headline inflation to fall further, mainly reflecting stronger currency and lower crude oil prices.
Author: Dirina Mançellari, Senior Economist