Bank of England Leaves Policy Settings as Is But Paints a Difficult Future

August 3, 2017

The Bank of England held a meeting of the Monetary Policy Committee and released a quarterly Inflation Outlook. Officials…

  1. Kept the Bank Rate at 0.25%, its level since a 25-basis point cut a half year ago.
  2. Didn’t change the GBP 435 billion ceiling on gilt purchases. Such was raised by GBP 60 billion last February.
  3. Also decided not to change the GBP 10 billion size of corporate bond holdings, introduced also last February.
  4. Released cut projected GDP growth to 1.7% from 1.9% for this year and to 1.6% from 1.7% for 2018.
  5. Predicted inflation staying above the 2.0% target for the entire forecast horizon.
  6. Trimmed assumed potential non-inflationary GDP growth.

The summary statement explaining the MPC’s decisions and Governor Carney’s press conference accentuated the growth-dampening impact of the British people’s referendum decision to leave the European Union. Sterling reacted appropriately to crossing that Rubicon, and depreciation along with weak productivity growth has lifted inflation above target. The vote to keep the Bank Rate was supported by 6 of 8 committee members. One of the three members, who dissented at the previous policy review, has since left the committee. The majority seems comfortable with tolerating inflation above 2.0% for a while because the medium-term inflation view has such settling back into target eventually. Despite this lack of urgency to tighten now, members are staying vigilant against the possibility of stronger-than-assumed demand, slippage in the confidence in medium-term price stability or any other development that would diverge from the current forecast. Even

 If the economy follows a path broadly consistent with the August central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the path implied by the yield curve underlying the August projections.  All members agreed that any increases in Bank Rate would be expected to be at a gradual pace and to a limited extent.  The Committee will continue to monitor closely the incoming evidence, and stands ready to respond to changes in the economic outlook as they unfold to ensure a sustainable return of inflation to the 2% target.

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

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