United Kingdom: BoE stays put but suggests that rate hike is likely before year-end
June 18, 2014
At its 4–5 June 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, “in the absence of other inflationary pressures, it would be necessary to see more evidence of slack being absorbed before an increase in Bank Rate would be warranted.”
In the minutes that the Monetary Policy Committee released on 18 June, the Bank acknowledged that the global economy performed slightly worse in the first months of the year. In particular, recent GDP data for the United States was revised down and Chinese growth remained subdued. However, the Bank also noted that Japan has seen longer-than-expected growth in Q1 2014. Regarding the Euro area, output was lower than the Bank had expected in its May Inflation Report, mainly because of the weak performance of France, Italy and the Netherlands.
As for the situation of the British economy, the MPC stated that, as in the previous month’s statement, there have been little changes in the outlook for the British economy. According to the Bank, Q2 GDP is expected to remain steady around the 0.8% quarterly expansion tallied in Q1. The Bank acknowledged that within the Committee there was a range of views regarding the current degree of slack in the economy. As the Bank put it, “on the one hand, output growth had been stronger, and unemployment had fallen faster,” than anticipated, but, “on the other hand, wage growth and inflation had been weaker.” Therefore, the Bank seemed supportive of the recently-debated idea that most of the UK recovery might be stemming from increased labor supply, whereas productivity gains remain weak.
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 supermarket prices for food. The Bank remarked that, despite April’s increase in inflation, when CPI increased 1.8% year-on-year, the, “short-term outlook had again been revised down marginally.” In fact, CPI inflation inched down to 1.7% in May.
Last month the Bank indicated that it would start discussing a Bank Rate in the following month. Accordingly, the Bank said in this month’s minutes that the possibility of a rate hike had increased and that most of the potential increase was already priced-in by one-year interest rates in the money markets. The Bank added that, “the economy was starting to return to normal,” and therefore, “part of that normalization would be a rise in Bank Rate at some point.” In particular, it stated that, “it still seemed likely that when the Bank Rate began to rise, it would do so gradually and to a level below its pre-crisis average rate.” Despite inflation being below the Bank’s target, the speed of the reduction in GDP slack will affect prices as soon as rises in wages and prices start to accompany the labor-supply-driven part of the economic recovery. Indeed, the Banks said that, “the precise timing of the rise would depend on the outlook for inflation.”