United Kingdom: BoE stays put in September, but hints that rate rise could be imminent
September 14, 2017
At its meeting which ended on 13 September, the Monetary Policy Committee (MPC) of the Bank of England (BoE) voted by a seven to two majority to leave the bank rate at 0.25%, where it has been since August of last year. 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.
The Central Bank opted to leave the interest rate unchanged to support an economy buffeted by sluggish private consumption and business investment, in view of the highly uncertain panorama the country faces until more clarity emerges from Brexit negotiations. However, in contrast to August’s meeting, the BoE made it clear that a rate rise could come in the next few months. This change of stance caused the pound to shoot up against the dollar, and comes as inflation overshot market expectations in August due to the depreciation of the sterling continuing to feed through to prices. In addition, the fall in the unemployment rate to 4.3% in July suggests that spare capacity in the economy is becoming limited, which could start pushing up wages and generating further inflationary pressures going forward.
The Bank struck a more hawkish tone in its communiqué, stating for the first time that inflation was likely to rise above 3.0% in October, which is largely in line with the forecast of FocusEconomics panelists. As a result, the BoE suggested that monetary tightening, which many panelists had penciled in for next year, could be imminent. The Bank has consistently emphasized that there was a limit to the level of above-target inflation it was willing to tolerate, even in the current exceptional circumstances surrounding the UK’s exit from the EU. It appears that limit is close to being breached.
Author: Oliver Reynolds, Economist