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United Kingdom Monetary Policy August 2018

United Kingdom: BoE hikes rates in August

At its meeting ending on 1 August, the Monetary Policy Committee (MPC) of the Bank of England (BoE) voted unanimously to raise the Bank Rate from 0.50% to 0.75%. The Bank also voted unanimously to continue its purchases of investment-grade corporate bonds 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.

The Bank justified its decision to raise rates by pointing to the seeming pick-up in economic growth in the second quarter, a tightening labor market—with the unemployment rate currently at a multi-decade low—and stronger retail sales. In addition, economic slack in the economy appears limited, which the BoE judged will generate greater domestic price pressures going forward. Moreover, inflation remains above the Bank’s 2.0% target, pushed up by the past depreciation of sterling and higher oil prices, and is expected to remain so in the coming quarters.

In its communiqué, the BoE again made clear that monetary policy will tighten going forward, albeit gradually and to a limited extent. Despite the fading impact of the weaker currency, domestic price pressures will likely build on emerging capacity constraints, necessitating subsequent rate hikes. However, in a press conference on the MPC decision, Governor Mark Carney made clear the Bank would consider holding or cutting rates depending on the outcome of Brexit negotiations. Regarding the Bank’s QE program, in June the Bank stated it would consider scaling back asset purchases once the Bank Rate reaches around 1.50%. FocusEconomics panelists expect this to occur in 2021.

UK Interest Rate Forecast

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