Bank of England Defers Policy Easing to August

July 14, 2016

The dominant market expectations earlier this week had been that the Bank of England’s Bank Rate, which has been at 0.50% since March 2009, would be cut at today’s meeting.  An expansion of quantitative easing was also thought likely.  The GBP 375 billion ceiling on the asset purchase program was reached in late 2012.  These expectations were not met, but a released statement clarified that most but not all members of the 9-person Monetary Policy Committee agreed that policy needs to be loosened soon but favor doing so at the August meeting rather than now because

  • It is too soon to quantify the impact of the Brexit vote on growth, inflation and sterling.  Post Brexit, there only preliminary survey evidence and no hard data.  That won’t still be the case a month from now.
  • The August meeting coincides with the central bank’s preparation and release of the next scheduled quarterly Inflation Report with new macro-economic forecasts.
  • Only radically new developments would divert officials from easing in August, but while confidence is high that easing will be necessary by then, officials need to know something about Brexit’s immediate real economic and financial market effect as well as what is likely to unfold in coming months, which the Inflation Report will address, in order to understand how much stimulus to enact and what kinds of measures are best to do.

One MPC member, Gertjan Vliegh, favored cutting the base rate to 0.25% now without waiting a month.  All members agreed not to resume quantitative easing just yet.  The Bank of England is in a delicate political spot, having taken a public and vocal position before the Brexit referendum that leaving the EU would do significant harm to growth, inflation, and the external value of the pound.  Proponents of exiting the EU accused the central bank of interfering on a political matter and called on Governor Carney to resign, which he refuses to do.  With that history, it is understandable that monetary policymakers do not want to appear overly impulsive in how they proceed now that voters have rendered a decision.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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