United Kingdom Monetary Policy

United Kingdom

United Kingdom: Bank of England stays put, but first discrepancy appears among MPC members since 2011

August 20, 2014

At its 6-7 August 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. Whereas the decision regarding the size of the stock of asset purchasing was taken unanimously, two members of the nine-member Committee voted in favor of raising the Bank Rate by 25 basis points. This is the first time since July 2011 in which there is a discrepancy within the MPC members about the Bank Rate action. That said, the Bank continued to see the Rate as appropriate, considering the current state of the economy and the outlook for the coming months.

In the minutes that the Monetary Policy Committee released on 20 August, the Bank acknowledged that news regarding the outlook for the global economy was mixed. The Bank considered the U.S. Q2 GDP figures improving the bad reading seen in Q1, although it did not derive an optimistic outlook from the data, as quarter-on-quarter growth has not been a, “reliable indicator of sustained growth above trend,” since the crisis. The Committee saw the Eurozone economy as not showing signs of improvement, despite the positive GDP reading in Spain, one of the region’s most struggling countries. The Bank continues to see that the inflation outlook in the Eurozone is not helping to improve the periphery countries’ competitiveness, since core economies are expected to keep inflation below 2.0%, which, “might well prove a greater and more persistent drag on euro-area activity.” Regarding China, the Bank sees growth targets being met, especially after the Chinese authorities introduced several stimulus measures in the last months.

Regarding the situation in the UK, the evolution of indicators in the labor market continues to be at the center of the stage, as these are expected to be the main determinants of the Bank’s next move. Unemployment has been falling steadily in the last months (see unemployment text). However, wages are increasing below inflation, a fact that most members of the Bank see as proving that the spare capacity in the economy is still too big to argue in favor of a Bank Rate rise. In addition, productivity growth rates implied by the combination of GDP growth and labor market figures remain at the shocking lowest levels since the nineteenth century (with the exception of the two post-war periods). This fact also questions the strength of the recovery, as well as the degree of slack in the economy, which the Committee estimates to be currently at around 1.0% of GDP. The two members of the MPC who voted for a rise in the Bank Rate argued that wages react to market conditions with a delay and that given that monetary policy also acts with a delay, the best option was to increase the rate by 25 basis points in advance of future wage increases. However, the majority of members still see the Bank Rate at the appropriate level, and reiterated that, “when Bank Rate did begin to rise, it was expected only to do so gradually.”

Despite the political developments in Ukraine and Russia as well as in the Middle East, the Portuguese Banco Espirito Santo’s big losses and the Argentinian technical default on some of its bonds, the Bank does not see domestic financial conditions to be subject to tensions. Economic growth in the UK is expected to remain strong and inflation is not seen to be above the 2.0% target in the coming months. Therefore, the Bank considered that leaving the Bank Rate unchanged was consistent with these facts and restated that, “the actual path for monetary policy, even after the first rise in Bank Rate would, however, remain dependent on economic conditions.”

The Bank of England acknowledged that financial market prices suggest expectations of a 25 basis point increase in the Bank Rate in the first quarter of 2015. In line with this, only a third of FocusEconomics Consensus Forecast panelists see the Bank raising the Bank Rate before the end of the year. In fact, the Consensus Forecast indicates that the first Bank Rate hike will likely occur in the first months of 2015. Within this setting, the majority of FocusEconomics Consensus Forecast panelists expect the BoE to leave interest rates unchanged at 0.50% this year, with an average forecast for the year-end Bank Rate of 0.58%. For next year, the panel expects the Bank Rate to end the year at 1.33%.


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United Kingdom Monetary Policy Chart

United Kingdom Monetary Policy August 2014

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

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