United Kingdom: BoE keeps the Bank Rate on hold in November, upgrades GDP and inflation forecasts
November 3, 2016
At its meeting on 3 November, the Monetary Policy Committee (MPC) of the Bank of England (BoE) voted to keep the Bank Rate unchanged at 0.25% and to keep the total stock of purchased assets at GBP 435 billion—financed by the issuance of Central Bank reserves. Both decisions were taken unanimously and were expected by the markets.
The BoE had eased its monetary policy stance in August for the first time in over seven years in an effort to stimulate the British economy against the backdrop of Brexit headwinds. Back then, the majority of MPC members expected another Bank Rate cut to take place before year-end. Three months since then, however, indicators for economic activity and business confidence have recovered from the downturn recorded right after the Brexit vote and the preliminary Q3 GDP estimate came in above expectations. Moreover, the housing market has been resilient since August and private consumption has grown at a robust rate. This better-than-projected data suggest that the near term outlook for the UK economy is brighter than initially expected in August. In its November Inflation Report, the Bank revised its GDP forecast and now expects the economy to expand 2.2% in 2016 and 1.4% in 2017 (previously estimated: 1.9% in 2016 and 0.7% in 2017).
In November, the Bank also revised up its inflation estimates taking into consideration the steep depreciation of the pound. Inflation is expected to average 1.3% this year (previously estimated: 0.7%) before crossing the Bank’s 2.0% target next year and averaging 2.8% (previously estimated: 1.9%). Developments since August, in particular the impact of the weak currency on inflation, have adversely affected the trade-off between returning inflation to target and supporting economic activity. The Bank commented that, “this impact will ultimately prove temporary, and attempting to offset it fully with tighter monetary policy would be excessively costly in terms of foregone output and employment growth.” However, the MPC also added that there are limits to the extent to which above-target inflation can be tolerated and these limits depend on “the cause of the inflation overshoot, the extent of second-round effects on inflation expectations and domestic costs, and the scale of the shortfall in economic activity below potential.”
Author: Dirina Mançellari, Senior Economist