BoE Leaves Rates Unchanged

The Bank of England voted unanimously to leave the Bank Rate steady at 0.75 percent on November 1st 2018, in line with market expectations. Policymakers said that if the economy continues to develop in line with forecasts, further tightening will be appropriate. The stock of UK government bond purchases, financed by the issuance of central bank reserves, was maintained at £435 billion.

The central bank lowered growth forecasts for both 2018 (1.3 percent from 1.4 percent) and 2019 (1.7 percent compared to 1.8 percent). Inflation is seen higher at 2.5 percent (2.3 percent in the August forecast) in the end of 2018 but lower at 2.1 percent (2.2 percent) in Q4 2019. 

Excerpts from the BoE Monetary Policy Summary:

The global economy continues to grow at above potential rates, supporting UK net trade. Growth has softened, however, and become more uneven across countries, and downside risks have risen. Global financial conditions have tightened, particularly in emerging market economies, and activity has slowed in the euro area.  Trade restrictions have increased and there is a risk of further escalation.

The MPC judges that aggregate supply and demand are now broadly in balance. The labour market remains tight, with the employment rate and vacancies around record highs, and the unemployment rate at its lowest since the mid-1970s. Regular pay growth has been stronger than expected, rising to over 3%.  Although modest by historical standards, the projected pace of UK GDP growth is slightly faster than the diminished rate of supply growth, which averages around 1½% per year. A margin of excess demand is therefore expected to build, feeding through into higher growth in domestic costs. The contribution of external cost pressures, which has accounted for above-target inflation since the beginning of 2017, is projected to ease over the forecast period. Taking these influences together, CPI inflation is projected to remain above the target for most of the forecast period, before reaching 2% by the end of the third year.

The economic outlook will depend significantly on the nature of EU withdrawal, in particular the form of new trading arrangements, the smoothness of the transition to them and the responses of households, businesses and financial markets. The implications for the appropriate path of monetary policy will depend on the balance of the effects on demand, supply and the exchange rate. The MPC judges that the monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction.

At this meeting the MPC judged that the current stance of monetary policy remained appropriate. The Committee also judges that, were the economy to continue to develop broadly in line with the November Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2% target at a conventional horizon. Any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent. 

BoE Leaves Rates Unchanged

BoE | Joana Taborda |
11/1/2018 1:13:49 PM