United Kingdom: BoE acknowledges more diversified sources of growth, maintains stance
March 19, 2014
At its 5-6 March 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 £375 billion. Both decisions, which the MPC made unanimously, were in line with market expectations. In the Minutes of the March Monetary Policy Committee released on 19 March, the Bank acknowledged that financial markets had not overreacted to the change in its forward guidance scheme following the February Inflation Report. Moreover, the Bank said that financial markets remained relatively stable compared to the previous month. In particular, volatility in emerging economies' foreign exchange markets, such as Turkey, Indonesia, South Africa and Argentina, eased in the last month, with these currencies showing different degrees of appreciation. Regarding the recent political conflict between Russia and Ukraine and its impact on global financial markets, the Bank stated that this was not significant, given that, “the direct trade and financial linkages between the United Kingdom and Ukraine were limited.” However, the Bank remained vigilant regarding a potential inflationary threat concerning, “any general rise in risk premia and via commodity markets - in particular the prices of gas, oil and grains.” Regarding the domestic economy, the Bank commented on the more diversified growth path that the economy appears to have taken. This contrasted the view that growth was too reliant upon household consumption and dwellings investment, and suggested that a broader source of growth drove the 0.7% rise in Q4 2013 GDP. In particular, the Bank said that this concern was reduced given that the, “level of business investment was estimated to have been 2% higher in the fourth quarter.” Therefore, the Bank thinks that, “recovery over the past year might not have been as reliant on the household sector as it had previously appeared.” Therefore, it maintained the central expectation of growth for Q1 2014 at 0.9% and expects the economy to perform “only fractionally weaker” in the second quarter. In terms of price developments, the Bank said that the expected reduction in the spare capacity of the economy in the coming quarters is the main factor that could add some degree of demand-driven inflationary pressures. However, inflation fell below the 2% target for the first time in four years in January. Therefore, the Committee members unanimously agreed that the probability of inflation being above 2.5% remains below 50%, and is thus far from posing a threat to the ‘knockout conditions' that the Bank stated in its August 2013 Inflation Report. The knockout conditions are: inflation above 2.5% over the next 18 to 24 months; medium term inflation expectations not “sufficiently well” anchored; and financial instability. The next monetary policy meeting is scheduled for 9-10 April. The majority of FocusEconomics Consensus Forecast panelists expect the BoE to leave interest rates unchanged at 0.50% this year, with an average forecast of 0.54%. For next year, the panel expects the Bank Rate at a year-end of 0.54%.