United Kingdom: BoE stays put, views regarding timing of Bank Rate hike differ among MPC members
July 23, 2014
At its 9–10 July 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. Although the decision was taken unanimously, the MPC acknowledged that discussions regarding a Bank Rate hike have been more balanced in recent meetings than they were at the outset of the year. That said, members of the MPC agreed that, “the actual path for monetary policy, even after the first increase in Bank Rate, would remain dependent on economic conditions,” which suggests that the MPC has not yet set clear action path.
In the minutes that the Monetary Policy Committee released on 23 July, the Bank acknowledged that news regarding the outlook for the global economy was on the downside. This was mainly due to the strong downward revision to Q1 U.S. GDP estimate resulting from harsh weather conditions. The Bank still sees that the incipient Eurozone recovery is fragile, although it did acknowledge the improving outlook for the peripheral countries of the Euro area. The Bank also mentioned concerns regarding excessive growth in China’s shadow banking system, although it also stated that Chinese economic growth remained healthy.
Regarding the situation in the UK, the Bank’s discussion continued to center around the degree of slack in the economy as this is likely to be the main determinant of the timing of the Bank Rate hike. While employment figures were still strong, wage growth was “surprisingly weak”. The members of the Committee acknowledged that the degree of actual slack in the economy is assessed differently depending on how the economic data is interpreted. However, “members had no preset timing for the first increase in Bank Rate, which would be driven by the data.”
The Bank’s May Inflation Report showed that CPI inflation was expected to stay below the 2.0% target at least for the next three years. June’s inflation figure (see inflation text) took the MPC members by surprise and absorbed a great part of the discussion, providing a wide variety of interpretations. On one hand, some members of the MPC considered that risk is waning that a small Bank Rate hike could derail the recovery. This interpretation considers that hiking the Bank Rate while the economy is in strong expansionary conditions would allow the Bank to assess the sensitivity of households, firms and financial markets without incurring too much economic risk. On the other hand, despite June’s spike in inflation, prices have apparently remained insensitive to the monetary expansion. Some members felt that this suggests that slack could be larger than previously thought or that a structural change in the relationship between employment and inflation could be taking place. In the latter case, the Bank stated that, “a premature tightening in monetary policy might leave the economy vulnerable to shocks, with the effectiveness of any further stimulus uncertain.”