The Bank of England Keeps Monetary Policy Unchanged

The Monetary Policy Committee, voted by a majority of 8-1 to maintain Bank Rate at 0.5% and unanimously to maintain the stock of purchased assets at £375 billion. The Bank has also raised its growth forecasts for this year and cut its inflation projection.

Extracts from Monetary policy summary, August 2015

The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy in order to meet the 2% inflation target and in a way that helps to sustain growth and employment.

CPI inflation fell back to zero in June.  As set out in the Governor’s open letter to the Chancellor, around three quarters of the deviation of inflation from the 2% target, or 1½ percentage points, reflects unusually low contributions from energy, food, and other imported goods prices. The remaining quarter of the deviation of inflation from target, or ½ a percentage point, reflects the past weakness of domestic cost growth, and unit labour costs in particular. The combined weakness in domestic costs and imported goods prices is evident in subdued core inflation, which on most measures is currently around 1%.
In its latest economic projections, the Committee projects UK-weighted world demand to expand at a moderate pace.  Growth in advanced economies is expected to be a touch faster, and growth in emerging economies a little slower, than in the past few years. The support to UK exports from steady global demand growth is expected to be counterbalanced, however, by the effect of the past appreciation of sterling.  Risks to global growth are judged to be skewed moderately to the downside reflecting, for example, risks to activity in the euro area and China.
Private domestic demand growth in the United Kingdom is expected to remain robust.  Household spending has been supported by the boost to real incomes from lower food and energy prices. Wage growth has picked up as the labour market has tightened and productivity has strengthened.  Business and consumer confidence remain high, while credit conditions have continued to improve, with historically low mortgage rates providing support to activity in the housing market. Business investment has made a substantial contribution to growth in recent years.

The near-term outlook for inflation is muted. The falls in energy prices of the past few months will continue to bear down on inflation at least until the middle of next year. Nonetheless, a range of measures suggest that medium-term inflation expectations remain well anchored.
Sterling has appreciated by 3½% since May and 20% since its trough in March 2013. The drag on import prices from this appreciation will continue to push down on inflation for some time to come, posing a downside risk to its path in the near term. 
Were Bank Rate to follow the gently rising path implied by market yields, the Committee judges that demand growth would be sufficient to return inflation to the target within two years. In its projections, inflation then moves slightly above the target in the third year of the forecast period as sustained growth leads to a degree of excess demand.
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.  The Committee will continue to monitor closely the incoming data.

The MPC now expects the economy to grow 2.8 per cent this year, higher than its previous forecast from May. The Bank halved its forecasts for inflation in 2015 from 0.6 per cent to 0.3 per cent on the back of falling oil prices and the prolonged strength of sterling.

Bank of England |
8/6/2015 12:23:35 PM