United Kingdom Monetary Policy January 2016

United Kingdom

United Kingdom: BoE leaves rates unchanged in January

January 13, 2016

At its 13 January 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. In the last six meetings, including the one in January, the same member of the nine-member Committee has continuously voted in favor of increasing the Bank Rate by 25 basis points. Conversely, the other members have seen the current rate as appropriate considering the inflation outlook as well as the existing 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 the British economy showed steady growth throughout 2015. Recent indicators regarding private domestic demand, such as consumer spending and business investment data, show that growth remains robust. Moreover, the Markit/CIPS composite PMI was broadly stable in December. The Bank also commented that spare capacity in the economy has decreased and, as a result, domestic cost pressures are expected to pick-up.

Regarding price developments, the MPC commented that inflationary pressures are expected to increase in the months ahead as the base effect of the drop in energy and food prices will fade. In addition, cost pressures on the domestic front are expected to increase on the back of an improvement in productivity. The Bank added that, “CPI inflation would slightly exceed the 2% target in two years’ time and then rise further above it, reflecting modest excess demand.”

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. The MPC commented that when the policy rate begins to rise, it will do so only gradually and to a level lower compared to the previous cycles. The pace of increase will be contingent on the economic circumstances.

FocusEconomics Consensus Forecast panelists expect the Bank Rate to end 2016 at 1.09%. For 2017, the panel sees the Bank Rate ending the year at 1.66%.

Author:, Senior Economist

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United Kingdom Monetary Policy Chart

United Kingdom Monetary Policy January 2016 0

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

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