United Kingdom: BoE keeps the Bank Rate unchanged in June
June 16, 2016
At its 16 June meeting, the Monetary Policy Committee (MPC) of the Bank of England (BoE) kept the Bank Rate on hold at 0.50% and left the stock of asset purchasing at GBP 375 billion. Both decisions were in line with market expectations. Just as in the previous month’s meeting, the Committee voted unanimously on the proposals for keeping both the Bank Rate and the stock of asset purchasing unchanged.
After setting out a detailed assessment of the British economy in its May Inflation Report, this month the BoE commented that in the last month there has been limited news on the outlook of the economy. The latest evidence from the foreign exchange market shows that if the United Kingdom were to leave the European Union the pound would drop sharply. The Bank stated that, “this would be consistent with changes to the fundamentals underpinning the exchange rate, including worsening terms of trade, lower productivity, and higher risk premia.” While consumer confidence has been at relatively-high levels lately, the uncertainty surrounding the Brexit vote has led to delays in major economic decisions such as commercial and real estate transactions as well as business investment.
Regarding price developments, the MPC commented that inflation remains well below the Bank’s 2.0% target due to a drag from external factors. The inflation projections the Committee presented in May were conditioned on the UK remaining in the EU. Consistent with those projections, the Bank again judged it is more likely than not that the Bank Rate will need to be higher by the end of the forecast period ending in Q2 2019. Moreover, all members of the Committee agree that, “given the likely persistence of the headwinds weighing on the economy, when [the] Bank Rate does begin to rise, it is expected to do so more gradually and to a lower level than in recent cycles. This guidance is an expectation, not a promise. The actual path Bank Rate will follow over the next few years will depend on economic circumstances. “
Author: Dirina Mançellari, Senior Economist