United Kingdom: BoE more confident about global recovery, maintains stance
April 23, 2014
At its 9 April meeting, the Monetary Policy Committee (MPC) of the Bank of England (BoE) decided to keep the Bank Rate unchanged at 0.50% and left the stock of asset purchasing at GBP 375 billion. Both decisions, which the MPC made unanimously, were in line with market expectations.
In the Minutes of the March Monetary Policy Committee released on 23 April, the Bank acknowledged the tightening in international finance following the Federal Reserve's reduction of its asset purchase program on 19 March. The BoE said that short-term market interest rates have risen since the Fed's decision, although a low level of implied volatility was present in the markets despite the tightening. Moreover, ten-year government bond yields in some of the major economies fell slightly in March, which points to an overall stable outlook for financial conditions. The Bank attributed this stability to a stronger-than-expected recovery in the Eurozone as well as to continuing signs of improvement in the United States. That said, the Bank raised some concerns regarding the deceleration in the Chinese economy. Although the expected impact on the UK economy remains uncertain, potential financial instability in China could pose a more/the most significant threat.
Regarding the domestic economy, the MPC continued to note a degree of diversification in the UK growth engines. In particular, the Bank has observed a transition from household spending to business spending, which would ultimately translate into higher levels of private investment and lower unemployment. Moreover, the Bank stated that, “output had grown consistently across all sectors in January and February.” Nevertheless, the increase is still highly supported by credit growth, although the Bank foresees, “scope for further improvements in credit supply conditions.”
As for developments in consumer prices, the Bank sees inflation moderating further, on the back of “duty changes announced in the budget, weak online food price data and lower sterling oil prices.” Overall, the Bank does not see inflation rising above 2.5% in the next 18 to 24 months, which leaves room for the Bank to maintain its current monetary policy stance. In fact, inflation fell to 1.6% in March, which was below the Bank's target of 2.0%.
The majority of FocusEconomics Consensus Forecast panelists expect the BoE to leave interest rates unchanged at 0.50% this year, with an average forecast of 0.54%. For next year, the panel expects the Bank Rate to end the year at 0.54%.