BoE Leaves Monetary Policy Unchanged

The Bank of England Monetary Policy Committee voted unanimously to maintain the Bank Rate at 0.5 percent and leave the stock of purchased assets at £375 billion on March 17th, 2016 as widely expected. Policymakers said inflation remains weak and noted that the uncertainty surrounding the referendum on UK membership of the European Union may delay spending decisions and depress growth.

Excerpts from Monetary policy summary, March 2016:

Twelve-month CPI inflation rose to 0.3% in January. Inflation nonetheless remains well below the 2% inflation target. This is due predominantly to unusually large drags from energy and food prices, which are expected to fade in the coming months. But core inflation also remains subdued, a consequence of the past appreciation of sterling, weak global inflation and restrained domestic cost growth.  

Returning inflation to the 2% target requires balancing the drag from external factors against increases in domestic cost growth. Fully offsetting that drag over the short run would, in the MPC’s judgement, involve too rapid an acceleration in domestic costs, one that would risk being unsustainable and would lead to undesirable volatility in output and employment.  Given these considerations, the MPC intends to set monetary policy to ensure that growth is sufficient to return inflation to the target in around two years and keep it there in the absence of further shocks.

The MPC set out its most recent detailed assessment of the economic outlook in the February Inflation Report. Over the medium term, growth in the advanced economies should continue to be supported by the boost to real incomes from low commodity prices, and to some degree by fiscal and monetary policy. But emerging market economies are likely to grow more slowly than in recent years and the risks to the MPC’s central projection of only modest global growth lie to the downside.  Data releases since the February Inflation Report show little change in the near-term outlook for growth in the United Kingdom’s main trading partners. 

Set against that, there appears to be increased uncertainty surrounding the forthcoming referendum on UK membership of the European Union. That uncertainty is likely to have been a significant driver of the decline in sterling.  It may also delay some spending decisions and depress growth of aggregate demand in the near term. Overall, however, the Committee judges the outlook for domestic activity to be little changed from the time of the February Inflation Report, with GDP expected to grow at around average rates over the forecast period.     

Wage growth has evolved broadly as expected in the February Inflation Report.  The return to higher rates of inflation should in time support wage gains. The MPC judges that inflation expectations remain well anchored, though it remains watchful for signs that low inflation is having more persistent second-round effects on wages. Overall, while domestic cost growth over the past year has been below that necessary for inflation to return to the 2% target, its pace is expected to increase over time. 

As in February, there is a range of views among MPC members about the balance of risks to inflation relative to the central projection presented in the February Inflation Report.  At its meeting ending on 16 March, the MPC judged it appropriate to leave the stance of monetary policy unchanged. The MPC’s best collective judgement is that it is more likely than not that Bank Rate will need to increase over the forecast period to ensure inflation returns to the target in a sustainable fashion.

All members agree that, given the likely persistence of the headwinds weighing on the economy, when Bank Rate does begin to rise, it is expected to do so more gradually and to a lower level than in recent cycles.  This guidance is an expectation, not a promise.  The actual path Bank Rate will follow over the next few years will depend on the economic circumstances.

BoE Leaves Monetary Policy Unchanged

BoE | Joana Taborda |
3/17/2016 12:20:39 PM