United Kingdom Monetary Policy September 2016

United Kingdom

United Kingdom: BoE keeps the Bank Rate unchanged in September and signals more policy easing later this year

September 15, 2016

At its meeting on 15 September, the Monetary Policy Committee (MPC) of the Bank of England (BoE) voted unanimously to keep the Bank Rate unchanged at 0.25%. Moreover, the Committee decided to keep the total stock of purchased assets at GBP 435 billion, which will be financed by the issuance of central bank reserves. This decision was approved unanimously by the nine members of the MPC. Both moves were expected by the markets and came after the Bank had eased its monetary policy stance in August for the first time since March 2009, in an effort to stimulate the British economy against the backdrop of Brexit headwinds.

The BoE commented that the overall effect of last month’s Bank Rate cut has been encouraging and that it will continue to closely monitor the changes in asset prices and in interest rates faced by households and businesses as well as their effect on economic activity. In its August Inflation Report, the Bank made an assessment of the British economy based on surveys of business and consumer sentiment in the immediate aftermath of the Brexit vote. Since then, more high-frequency indicators have been released and the Committee now expects “less of a slowing in UK GDP growth in the second half of 2016.” In this sense, while most business investment surveys have weakened since the previous meeting, the near-term outlook for the housing market is now less negative than what the Bank had previously estimated since indicators of consumption are stronger than expected. This is consistent with BoE’s view that business spending would slow more sharply than consumer spending in response to the uncertainty regarding the EU referendum. Kallum Pickering, Senior UK Economist at Berenberg foresees a further bank rate cut before year-end:

“Monetary policy works with a lag and is therefore set with respect to expected rather than current conditions. Today the MPC maintained the guidance given in the August Monetary Policy Committee minutes with a slight alteration in order to allow for further easing even if the economic outlook is revised up in light of better than expected current conditions. […] Unless the stronger than expected current conditions lead to a material upward revision to next year’s GDP growth forecast, to say, above our own forecast of 1.3%, which looks unlikely, more likely than not, the ultra-dovish MPC will vote to cut the bank rate by a further 15bps to 0.1% before the end of year.”

Regarding price developments, the BoE commented that inflation remained at 0.6% in August, which is well below its 2.0% target. The Bank expects inflation to approach the target in the first half of next year as the drag from energy and food prices gradually attenuates. This month, the Bank’s view on the British economy for the medium to long term did not change. The BoE will assess the positive momentum of the economy along with the forthcoming economic indicators in its November Inflation Report. The Bank concluded that, “if, in light of that full updated assessment, the outlook at that time is judged to be broadly consistent with the August Inflation Report projections, a majority of members expect to support a further cut in Bank Rate to its effective lower bound at one of the MPC’s forthcoming meetings during the course of this year. The MPC currently judges this bound to be close to, but a little above, zero.”

FocusEconomics Consensus Forecast panelists expect the Bank Rate to end 2016 at 0.11%. For 2017, the panel sees the Bank Rate ending the year at 0.24%.

Author:, Senior Economist

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United Kingdom Monetary Policy Chart

United Kingdom Monetary Policy September 2016

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

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