United Kingdom: BoE stays put in August as lower inflation wards off a potential rate rise, cuts growth forecast
August 3, 2017
At its meeting ending on 2 August, the Monetary Policy Committee (MPC) of the Bank of England (BoE) voted by a majority of six to two to leave the Bank Rate at 0.25%. The Bank also voted unanimously to continue its purchases of investment-grade corporate bonds to the tune 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. All three decisions were in line with market expectations.
In contrast to the previous Central Bank meeting in June, which saw three committee members vote for a rate rise, the pressure on the Bank to immediately tighten monetary policy was less acute this time around. This is largely because CPI inflation unexpectedly fell back from 2.9% in May to 2.6% in June, breaking the upward surge observed since the back end of 2016. In addition, inflationary pressures are being generated entirely by weaker sterling, not by an overheating economy, meaning inflation should dip once imported price pressures pass through. Second-round effects should also be limited, as inflation expectations remain well-anchored. On the demand side, preliminary GDP figures for Q2 were underwhelming, with the UK now growing significantly slower than many European neighbors, and real living standards continue to be squeezed due to measly wage growth. Faced with this situation, the BoE hence decided that leaving interest rates at their current record-low level would encourage activity and support the vulnerable economy. The bank cut its forecasts for 2017 and 2018 wto 1.7% and 1.6%, respectively.
The Bank made clear in its communique that monetary policy is likely to tighten going forward by a greater extent than markets are currently predicting in order to temper inflation, which the Bank forecasts could brush 3.0% in October this year. FocusEconomics panelists concur, and expect inflation to rear its head again in the coming months, although the vast majority of panelists expect the BoE to hold off from raising rates in the current year, due to the weak domestic economy and heightened political uncertainty.
Author: Oliver Reynolds, Economist