Bank of England Lifts Interest Rate as Expected

November 2, 2017

The Bank Rate was doubled to 0.50% because of a “steady erosion of slack” that “has reduced the degree to which it is appropriate for the MPC to accommodate an extended period of inflation above the target.” At 0.50%, the rate is back to the level prevailing from March 2009 until being halved in August 2016. Cunliffe and Ramsden dissented from the rate hike in a a 7-2 vote but not from a separate decision not to modify quantitative easing limits of GBP 435 billion on purchases of gilts and 10 billion pounds of corporate bonds.

The Monetary Policy Committee’s explanatory statement suggests only 50 basis points more of tightening to come during the forecast time horizon to be made in two installments separated by an extensive passage of time. In conjunction with updated growth and inflation forecasts that are little different from those made in August, this forward guidance casts today’s action as one of removing the incremental easing made shortly after the Brexit referendum’s result was learned but not as the start of a long series of moves such as the Fed has been doing. In the summer of 2016, central bank staff was bracing for a steeper slowdown of British growth in the short term than in fact occurred, and that initial view implied much more economic slack in the economy by late 2017 than is currently perceived. Moreover, inflation at 3.0% is now a full percentage point above target, a width of discrepancy that ought to elicit a monetary policy response to preserve the bank’s credibility.

But the new statement from officials does not back down from a pessimistic view regarding the long-term damage from Brexit.

The decision to leave the European Union is having a noticeable impact on the economic outlook.  The overshoot of inflation throughout the forecast predominantly reflects the effects on import prices of the referendum-related fall in sterling.  Uncertainties associated with Brexit are weighing on domestic activity, which has slowed even as global growth has risen significantly.  And Brexit-related constraints on investment and labour supply appear to be reinforcing the marked slowdown that has been increasingly evident in recent years in the rate at which the economy can grow without generating inflationary pressures.

The MPC’s remit specifies that, in such exceptional circumstances, the Committee must balance any trade-off between the speed at which it intends to return inflation sustainably to the target and the support that monetary policy provides to jobs and activity.

There remain considerable risks to the outlook, which include the response of households, businesses and financial markets to developments related to the process of EU withdrawal.
The MPC will respond to developments as they occur insofar as they affect the behaviour of households and businesses, and the outlook for inflation.
Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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