United Kingdom Monetary Policy

United Kingdom

United Kingdom: BoE says productivity gains could underpin the recovery, opens discussion for Bank Rate hike

May 21, 2014

At its 8 May 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. The MPC remarked that, “the actual path of Bank Rate would depend on the evolution of the economy, particularly the degree of slack, the prospects for its absorption and the broader inflation outlook.”

In the minutes that the Monetary Policy Committee released on 21 May, the Bank acknowledged that the expansion in the global economy will be sustained, although it will continue to face economic and financial challenges. Moreover, recent GDP data for the United States and China showed growth below expectations. In the case of the U.S. it was due to bad weather and erratic factors, which “should unwind in Q2”, whereas in the case of China, Q1 GDP data suggested declining momentum in addition to the vulnerabilities associated with the expansion of credit and the emergence of a shadow banking system. Regarding the Euro area, growth figures for the first quarter of the year were only slightly below their pre-crisis averages, while forward-looking indicators point to improved confidence and an easing in credit conditions.

As for the situation of the British economy, the MPC stated that, “there had been relatively little significant news.” According to the Bank, GDP growth is expected to ease a little in the near term, but it will remain relatively steady thereafter. After the pace of expansion eases, the Bank expects productivity to increase, which in turn can be supportive for an increase in real income, although the concrete timing of the pickup in productivity remains uncertain. Real income increases are expected to stimulate demand, which, given the accommodative credit conditions that the Bank has been putting in place since 2009, should foster firms’ capital spending. However, the Bank also stated that once productivity picks up in the near term, the path of absorption of spare capacity, which had been a fast process over the course of the last year, will start to slow down. Accordingly, the downward trend in the unemployment rate is expected to moderate in the near term.

Regarding consumer prices, the Bank sees CPI inflation remaining consistent with the 2.0% target in the near term, mainly due to expected drops in food prices and a decline in households’ inflation expectations. In fact, inflation edged up to 1.8% in April, thus remaining below the Bank’s target of 2.0%. In the minutes, the Bank also introduced a discussion regarding the future path of the Bank Rate, although it acknowledged a degree of uncertainty, “over the likely impact on the economy of a rise in Bank Rate.” Accordingly, the MPC said that, to the extent that the country’s productive capacity remains responsive to demand expansions, a rate hike would imply higher costs in forgone output, thus leaving any clear move toward future hikes to forthcoming MPC meetings.

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%.


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United Kingdom Monetary Policy May 2014

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


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