Bank of England Keeps Existing Stance

February 2, 2017

At the second post-Brexit referendum meeting of the 9-person Monetary Policy Committee, officials halved the Bank Rate to 0.25%, expanded the asset purchase program by 60 billion pounds to a ceiling of GBP 435 billion, and introduced a plan to purchases up to GBP 10 billion of corporate bonds. Four subsequent meetings and two published quarterly Inflation Reports later have  been come and gone, reaffirming the appropriateness of the policy settings.

Today’s monetary policy statement notes that consumer spending has been more resilient than assumed initially, prompting slightly upward revisions to projected GDP growth this year and in 2018 and 2019. These changes didn’t prompt a change the inflation prognosis nor in the committee’s willingness to tolerate inflation above the 2.0% medium-term target for several years. The decision not to augment monetary stimulus was made unanimously.

Inflation is expected to increase to 2.8% in the first half of 2018, before falling back gradually to 2.4% in three years’ time. Inflation is judged likely to return to close to the target over the subsequent year.

Monetary policy cannot prevent either the real adjustment that is necessary as the UK moves towards its new international trading arrangements or the weaker real income growth that is likely to accompany it over the next few years. Attempting to offset fully the effect of weaker sterling on inflation would be achievable only at the cost of higher unemployment and, in all likelihood, even weaker income growth. For this reason, the MPC’s remit specifies that in such exceptional circumstances the Committee must balance the trade-off between the speed with which it intends to return inflation to the target and the support that monetary policy provides to jobs and activity. At its February meeting, the MPC continued to judge that it remained appropriate to seek to return inflation to the target over a somewhat longer period than usual.

The Inflation Report released today upgrades projected GDP growth in the U.K. to 2.0% this year, 1.6% in 2018 and 1.7% in 2019. Last November’s estimates had depicted 1.4% in 2017 followed by 1.5% in 2018 and 1.6% in 2019. Subdued wages and income growth, however, produce a disconnect between this faster trend in economic growth and a basically unchanged CPI inflation profile that is projected at 2.7% in the final quarter of 2017, 2.6% a year after than, 2.4% 4Q19 and and a return to the 2% target not until late 2020 or early 2021.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

 

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