United Kingdom: BoE continues wait-and-see approach in May
May 11, 2017
At its meeting ending on 10 May, the Monetary Policy Committee (MPC) of the Bank of England (BoE) voted by a majority of seven to one to leave the Bank Rate at 0.25%. The Bank also voted unanimously to continue its purchases of investment-grade corporate bonds to the tune of up to GBP 10 billion and to maintain the total stock of UK government bond purchases at GBP 435 billion, financed by the issuance of Central Bank reserves. All three decisions were in line with market expectations.
The Bank’s decision to maintain its loose monetary stance comes after recently released figures which show that GDP growth slowed in Q1, with domestic demand flagging as consumers felt the effects of lower wage growth. The Bank reduced it's growth forecast for 2017 by 0.1% points to 1.9%. The reduced demand-push inflationary pressures, and means any rise in rates would have risked further dampening economic activity. Although inflation remains slightly above the Bank’s 2.0% target, this is virtually entirely down to the depreciation of sterling, the effects of which should start to ease themselves out of the system by the end of the year. In addition, with political uncertainty running high and Brexit talks to begin imminently, staying put was the safest option.
The tone of the communique was largely neutral, with the BoE stressing its willingness to tighten or loosen monetary policy as required going forward in response to changes in the economic panorama. The Bank did however hint at the possibility of a slightly less expansive stance in order to moderate the rise in inflation. The Bank expects inflation to rise above its 2.0% target in 2017 and average 2.8% in Q4, before gradually returning towards the target from 2018 onwards as cost-push pressures fade.
Author: Oliver Reynolds, Economist