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United Kingdom Monetary Policy March 2018

United Kingdom: BoE holds rates in March, but decision is not unanimous

At its meeting ending on 21 March, the Monetary Policy Committee (MPC) of the Bank of England (BoE) voted to leave the Bank Rate unchanged at 0.50%. However, two of the nine members present opted for a rate hike, contrary to market expectations of a unanimous decision to keep rates unchanged. The Bank 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, in line with market expectations.

The Central Bank’s decision came after inflation dipped notably in February as the impact of the past depreciation of sterling ebbed. However, at 2.7%, inflation was still substantially above the 2.0% target. On the demand side, recent indicators point to the economy continuing to expand at a similarly modest rate as in Q4. With inflation falling and growth mediocre, the Bank saw no need to raise rates again so soon after November’s hike.

In its communiqué, the BoE made it clear that monetary policy will tighten going forward. This is because despite the fading impact of the weaker currency, domestic price pressures will likely build on faster wage growth and emerging capacity constraints, with the Bank expecting demand in the economy to exceed supply by early 2020. With two board members already advocating a tighter stance on evidence of growing wage pressures, all eyes will now be on the next meeting on 10 May, when several of our panelists expect rates to rise by 0.25 basis points.

UK Interest Rate Forecast

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