United Kingdom: BoE's stance unchanged in December
December 15, 2016
At its meeting on 15 December, the Monetary Policy Committee (MPC) of the Bank of England (BoE) voted to keep the Bank Rate unchanged at 0.25% and to keep the total stock of purchased assets at GBP 435 billion—financed by the issuance of Central Bank reserves. Both decisions were taken unanimously and were in line with market expectations.
The MPC commented that data released since its last meeting in November point to moderate growth of the economy, mainly underpinned by solid consumption growth. However, economic activity is expected to weaken going forward. In November, the BoE set out its inflation and GDP growth projections for the short and medium term. The Bank expects the economy to grow at a moderate pace this year and decelerate next year. This is due to the high likelihood of a slower increase in real household income, which would in turn negatively affect household spending. The Bank commented that “the timing and extent of this slowing will depend crucially on the evolution of wages and how resilient household spending is to the pressure on real incomes from higher inflation.” Moreover, there are escalating concerns that UK-based businesses’ access to EU markets will be reduced significantly, thus harming the economy.
Regarding price developments, the Bank expects inflation to hit its target of 2.0% in the next six months and increase above the target in 2018 due to the depreciation of the sterling. The depreciation of the currency since the Brexit referendum has jeopardized the Bank’s trade-off between returning inflation to target and supporting economic activity. However, the Committee judges that the weakness of the currency will ultimately prove temporary and trying to fully offset it would result in higher pressure on domestic costs, including wages, which could in turn translate to lost output and higher unemployment. At the same time, there are limits to which the Bank can tolerate above-target inflation. The BoE added that, “those limits depend, for example, on the cause of the inflation overshoot, the extent of second-round effects on domestic costs, the evolution of inflation expectations, and the scale of the shortfall in economic activity below potential.”
Author: Dirina Mançellari, Senior Economist