Bank of England Publishes Quarterly Inflation Report with Updated Policy Guidance

February 12, 2014

The Inflation Report observes that

  • Unemployment probably reached the “guidance” threshold in January.
  • Real GDP is likely to expand 3.4% this year, considerably more quickly than bank officials imagined previously.
  • Excess productive capacity has not been eliminated fully and will keep inflation near the 2% medium term target.
  • Labor productivity is not growing as fast as forecast previously and is below the desired pace.
  • The GBP 375 billion stock of purchased assets will be maintained at least until the first hike of the Bank Rate, which has been at 0.5% since March 2009.
  • The market’s supposition of a first hike in the Bank Rate happening during the spring of 2015 seems to be a reasonable assumption.

Also due to significant remaining domestic and external economic headwinds, officials conclude that even with sub-7% unemployment, the bank rate can stay at 0.5% “for some time to come.” 

The report includes new forward policy guidance, updating the initial guidance announced last August.  Three points in this section of particular interest to investors are

  • The emphasis made that eventual policy tightening will proceed gradually and that the full-employment equilibrium level of the bank rate will be lower than the average of 5.0% seen before the 2007-9 global financial crisis struck.
  • No pre-determined path of tightening exists.  At present, such is uncertain.  Decisions will be data- and event-driven, and circumstances can be imagined that might even require a temporary partial reversal of tightening after such is under way.  Three broad factors determining the timing and pace of tightening are 1) the sustainability of Britain’s economic recovery, 2) the growth of labor productivity, which officials hope to see accelerate, and 3) the evolution of cost-push pressures related to the behavior of wage awards, import prices, and inflation expectations.
  • “Monetary policy may have a role to play in mitigating risks to financial stability, but only as a last line of defense if those risks cannot be contained by the substantial range of policy actions available to the Financial Policy Committee and other regulatory authorities.”

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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