United Kingdom Monetary Policy

United Kingdom

United Kingdom: BoE keeps rates unchanged

August 6, 2015

At its 6 August meeting, the Monetary Policy Committee (MPC) of the Bank of England (BoE) decided to maintain the Bank Rate unchanged at 0.50% and to leave the stock of asset purchasing at GBP 375 billion, as the markets had expected. One member of the nine-member Committee voted in favor of increasing the Bank Rate by 25 basis points, while 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 recent data point to robust domestic demand. In particular, in the second quarter, household spending was supported by a boost to real income due to lower food and energy prices. Adding to that, both business and consumer confidence remained strong amid a pickup in wage growth and higher productivity. Regarding the labor market, data suggest a slight weakening in employment demand and therefore greater slack in the economy than expected. Looking forward, robust domestic demand is expected to support growth despite the continuing fiscal consolidation and modest global growth. Strong domestic demand will likely generate an increase in domestic costs which is necessary to bring inflation closer to the target in the medium term.

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 pick up toward the end of the year. The Bank added that, “the path of inflation thereafter would be determined by: the influence of domestic cost pressures, especially those emanating from the labour market; the additional temporary impact of the most recent declines in oil prices; and any persistent impact on the prices of traded goods and services from the continued appreciation of sterling.”

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 members, 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.

FocusEconomics Consensus Forecast panelists expect the Bank Rate to end the year at 1.09%. For 2016, the panel sees the Bank Rate ending the year at 1.66%.

Author:, Senior Economist

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United Kingdom Monetary Policy Chart

United Kingdom Monetary Policy August 2015

Note: Asset Purchase Facility (APF) in GBP billion and Bank Rate in %.
Source: Bank of England (BoE).

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