United Kingdom: BoE keeps the Bank Rate unchanged
December 17, 2014
At its 3–4 December meeting, the Monetary Policy Committee (MPC) of the Bank of England (BoE) decided to keep the Bank Rate unchanged at 0.50% and to leave the stock of asset purchasing at GBP 375 billion, as was expected by the markets. The MPC continues to show divergence among its members regarding the Bank Rate action following three years of unanimous decisions. Two members of the nine-member Committee voted in favor of increasing the Bank Rate by 25 basis points. However, the majority continued to see the rate as appropriate considering the inflation outlook, as described in the November Inflation Report, as well as the current state of the economy. The decision to leave the stock of asset purchasing unchanged, however, was taken unanimously.
The Committee commented that the economy continues to gain momentum. The second estimate of GDP showed that in the third quarter, economic activity grew 0.7% over the previous quarter, which was unchanged from the preliminary estimate. However, the data suggested that consumption was stronger, while investment was weaker than previously estimated. Recently, the labor market has shown further improvement. Employment continues to grow, albeit at a softer pace. The Bank added that, “the increase in uncertainty about the outlook for the global economy might have led some firms to begin to scale back their hiring plans.” It might also point to a reduction in the degree of slack remaining in the labor market.
According to the Bank, one of the most significant economic developments since the previous meeting has been the decline in commodity prices, amongst which the fall in oil prices has been especially marked. The sharp reduction in oil prices as well as the appreciation of the sterling has put downward pressure on headline inflation. The Committee judged that if the decline in oil prices continues, it would, “act as a stimulus to growth in the United Kingdom and its main trading partners via its effect on the costs of production and real incomes.” Going forward, headline inflation is expected to dip below 1.0%, which is lower than the Bank’s 2.0% target in the medium term.
The seven 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 two 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.
Author: Dirina Mançellari, Senior Economist