United Kingdom: BoE leaves rates on hold in November
November 5, 2015
At its 4 November 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 the markets had expected. Similar to the previous three meetings, only one member of the nine-member Committee voted in favor of increasing the Bank Rate by 25 basis points. 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 Committee voted unanimously on the proposal to leave the stock of asset purchasing unchanged.
In its analysis of domestic conditions, the BoE commented that in the third quarter, the economy decelerated over the second quarter mainly reflecting softer expansions in the agriculture and industry sectors. Nevertheless, domestic momentum remains resilient and the Bank projects GDP growth to pick up towards the middle of 2016 on the back of robust consumer confidence and strong productivity in the labor market. The MPC added that slack in the economy has decreased and employment growth has picked up recently. The Committee estimates that there is spare capacity in the economy of around 0.5% of GDP.
In September, consumer prices dropped 0.1% on an annual basis, coming in below the flat reading observed in August and remaining well below the Bank’s inflation target of 2.0%. The annual decrease in consumer prices reflected drops in prices of energy, food and other imported goods. Looking forward, domestic cost pressures are expected to increase on the back of a pick-up in productivity. The Bank went on and added that, “CPI inflation is nonetheless expected to remain below 1% until the second half of next year, reflecting the continuing drag from commodity and other imported goods prices. […] In this context, the MPC judges it appropriate to return inflation to the target in around two years.”
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 member, 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