United Kingdom: BoE raises rates for first time in over ten years in November
November 2, 2017
At its meeting which ended on 1 November, the Monetary Policy Committee (MPC) of the Bank of England (BoE) voted by a seven-to-two majority to raise the bank rate from 0.25% to 0.50%. This marked the first rate hike in over a decade, and means the bank rate now sits at a level it has not been at since before last year’s Brexit referendum. The move was widely expected by markets following hawkish comments at the previous MPC meeting, and marked a rapid reversal in collective thinking; as recently as September, a large majority of the committee voted to keep rates unchanged. The Bank also voted unanimously to continue its purchases of investment-grade corporate bonds of up to GBP 10 billion and to maintain the total stock of UK government bond purchases at GBP 435 billion, financed by the issuance of Central Bank reserves.
The Central Bank’s decision came after inflation reached uncomfortably high levels in recent months, coming in at 3.0% in September, significantly above the 2.0% target. In addition, inflation could well have risen even further last month on the back of pass-through effects from the weak sterling and higher energy prices. On the demand side, growth was fairly solid in Q3 according to preliminary figures, with buoyant global demand and healthy domestic financial conditions acting as tailwinds. In addition, the unemployment rate remains at a multi-decade low, pointing to limited slack in the labor market. The relatively resilient economy could stoke demand-push price pressures going forward, particularly if real wage growth recovers. As a result of this confluence of factors, the Bank decided it was appropriate to raise rates to keep a lid on inflation.
However, monetary policy remains highly accommodative in order to support economic activity; The policy rate is still at a historically low level, and the Bank’s bond purchasing program will continue untouched.
The baseline scenario in the BoE’s November Inflation Report is for moderate growth of between 1.5%–2.0% over the coming years, and for inflation to gradually decline towards the 2.0% target over the forecast horizon. However, with the uncertainty clouding Brexit negotiations, unforeseen developments could prompt a reassessment of these figures. In this context, the Bank was at pains to make clear in its communiqué that any further monetary tightening is likely to be gradual and moderate in scope. FocusEconomics panelists concur, and expect only a mild rise in the bank rate over the coming years.
Lucas dos Santos, economist at BMI Research, is of a similar view:
“We do not expect this to be the first step in a concerted tightening cycle […] and we expect inflation to steadily decline in the coming quarters as the FX-induced shock wears off. We do not expect another hike in 2018, particularly if clarity on a transition deal fails to materialise early on in the year.”
Author: Oliver Reynolds, Economist