UK Leaves Monetary Policy Unchanged

The Bank of England Monetary Policy Committee voted by a majority of 8-1 to maintain the Bank Rate at 0.5 percent and unanimously to leave the stock of purchased assets at £375 billion at its November 2015 meeting. Policymakers lowered its inflation and growth forecasts and said outlook for global growth has weakened, signaling the central bank is in no rush to raise rates.

The central bank lowered its 2015 and 2016 GDP forecasts to 2.7 percent and 2.5 percent respectively and raised 2017 to 2.7 percent. The bank expects the inflation rate to remain below 1 percent until the second half of 2016 and to reach 2.1 percent in the third quarter of 2017. 

Excerpts from Monetary policy summary, November 2015:

The outlook for inflation reflects the balance between persistent drags from factors such as sterling and world export prices, and prospective further increases in domestic cost growth. The MPC’s objective is to return inflation to target sustainably; that is, without an overshoot once persistent disinflationary forces ultimately wane. Given these considerations, the MPC intends to set monetary policy to ensure that growth is sufficient to absorb remaining spare capacity in a manner that returns inflation to the target in around two years and keeps it there in the absence of further shocks. 

The outlook for global growth has weakened since the August Inflation Report. Many emerging market economies have slowed markedly and the Committee has downgraded its assessment of their medium-term growth prospects. While growth in advanced economies has continued and broadened, the Committee nonetheless expects the overall pace of UK-weighted global growth to be more modest than had been expected in August. There remain downside risks to this outlook, including that of a more abrupt slowdown in emerging economies. 

Robust private domestic demand is expected to produce sufficient momentum to eliminate the margin of spare capacity over the next year. Domestic cost pressures are expected to build as a result of a pickup in wage growth relative to productivity growth. CPI inflation is nonetheless expected to remain below 1% until the second half of next year, reflecting the continuing drag from commodity and other imported goods prices.  Beyond that, the dampening influence of sterling’s past appreciation on inflation is expected to be persistent, diminishing only slowly over the MPC’s forecast period. In this context, the MPC judges it appropriate to return inflation to the target in around two years.

In the Committee’s judgement, the lower path for Bank Rate implied by market yields would provide more than adequate support to domestic demand to bring inflation to target even in the face of global weakness. In that case, the MPC’s best collective judgement is for the most likely path for inflation to exceed slightly the 2% target in two years and then rise a little further above it, reflecting modest excess demand. The MPC judges that the risks to this projection lie slightly to the downside in the first two years, reflecting global factors.

Underlying those projections are significant judgements in a number of areas, as described in the November Inflation Report. In any one of these areas, developments might easily turn out differently than assumed, with implications for the outlook for growth and inflation, and therefore for the appropriate stance of monetary policy. Reflecting that, there is a range of views among MPC members about the balance of risks to inflation relative to the best collective judgement presented in the November Report. At the Committee’s meeting ending on 4 November, the majority of MPC members judged it appropriate to leave the stance of monetary policy unchanged at present.  Ian McCafferty preferred to increase Bank Rate by 25 basis points, given his view that the path of domestic costs was more likely to lead to inflation exceeding the target in the medium term than was embodied in the Committee’s collective November projections.

UK Leaves Monetary Policy Unchanged

BoE | Joana Taborda |
11/5/2015 1:36:01 PM