United Kingdom Monetary Policy

United Kingdom

United Kingdom: More dovish BoE pushes expectations for the first rate hike

November 19, 2014

The Monetary Policy Committee (MPC) of the Bank of England (BoE) decided to keep the Bank Rate unchanged at 0.50% and leave the stock of asset purchasing at GBP 375 billion at its 5–6 November meeting. The decision was expected by the markets. This is the fourth consecutive meeting in which there has been a divergence among the MPC members about the Bank Rate action following three years of unanimous decisions. In fact, two members of the nine-member Committee voted in favor of increasing the Bank Rate by 25 basis points. The Bank continued to see the rate as appropriate considering the inflation outlook described in the November Inflation Report as well as the current state of the economy. The decision to leave the stock of asset purchasing unchanged, however, was taken unanimously.

Regarding the domestic economy, the Committee commented that economic activity continued to grow at a pace consistent with the Bank’s expectations. The recent slowdown in the UK’s economic activity has been associated with weak external demand, given the slowdown in global economy, especially in the Euro area. In fact, recent surveys of business expectations suggest weakness in export orders. There have been limited signs of a slowing in private domestic spending, especially in the housing market, which is likely to affect housing investment growth. The Bank considers that there is still uncertainty about the actual amount of slack in the economy as well as the rate at which it is being used up. In its November Inflation Report, the Bank announced that growth is expected to fall back to around the historical average rate and that slack is foreseen being fully absorbed over the next three years.

Regarding consumer prices, the MPC said that the unanticipated weakness in headline inflation in the recent months reflects downward pressure from food, energy and the prices of other imported goods and services. In its November Inflation Report, the BoE announced that it has revised down its inflation forecasts for both this year and next. The Bank now expects inflation to remain close to 1.0% over the course of the next year and to return to the 2.0% target by the three-year forecast horizon.

The seven members who voted in favor of keeping the Bank Rate unchanged considered that the medium–term inflation outlook justified their stance. However, for the other two members, the economic circumstances and the fact that monetary policy could be expected to operate with a lag continued to justify an immediate increase in the Bank rate. Michael Saunders, Economist at Citi comments:

“Given the lower near term inflation outlook and signs of weakness in export-oriented sectors, plus the bias of most MPC members to postpone hiking while inflation and pay growth are weak, we are pushing back our forecast for the start of MPC hiking from Q1-2015 to Q2, and scaling back our end-2015 rate forecast to 1.25% (i.e. three 25bp hikes) from 1.75% (i.e. five hikes) previously.”

Within this setting, all of the FocusEconomics Consensus Forecast panelists expect the BoE to leave interest rates unchanged at 0.50% this year. For next year, the panel expects the Bank Rate to end the year at 1.33%.


Author:, Senior Economist

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United Kingdom Monetary Policy November 2014 1

Note: Asset Purchase Facility (APF) in GBP billion and Bank Rate in %.
Source: Bank of England (BoE).


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