United Kingdom: BoE considers inflation outlook and state of economy in decision to leave rates unchanged
September 10, 2015
At its 10 September meeting, the Monetary Policy Committee (MPC) of the Bank of England (BoE) decided to keep the Bank Rate unchanged at 0.50% and to leave the stock of asset purchasing at GBP 375 billion, as the markets had expected. Similar to the previous meeting, only one member of the nine-member Committee voted in favor of increasing the Bank Rate by 25 basis points. The other members continued to see the current rate as appropriate considering the inflation outlook as well as the current state of the economy. The decision to leave the stock of asset purchasing unchanged, however, was taken unanimously.
In its analysis of domestic conditions, the BoE commented that, in the second quarter, growth was mainly supported by robust government consumption and fixed investment. Moreover, both business and consumer confidence were strong amid a pickup in wage growth and higher productivity. Nevertheless, the Bank pointed out that economic news from the third quarter points to a slight slowdown of the economy. In fact, growth in industrial production slowed in July and the PMI dropped to its lowest level in over a year in August. Regarding the labor market, data suggest a slight weakening in employment demand and therefore greater slack in the economy than expected.
In July, consumer prices grew a weak 0.1% over the same month last year, inching up from the flat reading observed in June. Regarding price developments in the medium term, the MPC’s view is that inflation will likely, “remain close to zero for a few more months before picking up around the turn of the year.” In the medium term, the path of inflation will largely depend on the movements of the exchange rate as well as on the evolution of domestic costs.
The eight members who voted in favor of keeping the Bank Rate unchanged considered that the medium-term inflation outlook justified their stance. However, for the other member, the economic circumstances and the fact that monetary policy could be expected to operate with a lag continued to justify an immediate increase in the Bank Rate.
Author: Dirina Mançellari, Senior Economist