Bank of England

November 5, 2015

The Monetary Policy Committee combined many public communications into a single day, conveying a lack of urgency especially vis-a-vis the Federal Reserve, to begin the process of rate normalization.

The policy statement released after this month’s two day meeting left settings unchanged and revealed that only Ian McCafferty among the nine committee members wanted to hike the 0.50% Bank Rate now.  “The combined weakness in domestic costs and imported goods prices is evident in subdued measures of core inflation.”  Note is made that “the outlook for global growth has weakened since the August Inflation Report.”   Although “robust private domestic demand is expected to produce sufficient momentum to eliminate the margin of spare capacity over the next year…, CPI inflation is nonetheless expected to remain below 1% until the second half of next year, reflecting the continuing drag from commodity and other imported goods prices.  Beyond that, the dampening influence of sterling’s past appreciation on inflation is expected to be persistent, diminishing only slowly over the MPC’s forecast period.”  Bottom line, “The path for Bank Rate implied by market yields, on which the MPC’s projections are conditioned, has fallen and now embodies an even more gradual pace of tightening than at the time of the previous Report. …In the Committee’s judgement, the lower path for Bank Rate implied by market yields would provide more than adequate support to domestic demand to bring inflation to target even in the face of global weakness.  In that case, the MPC’s best collective judgement is for the most likely path for inflation to exceed slightly the 2% target in two years and then rise a little further above it, reflecting modest excess demand.  The MPC judges that the risks to this projection lie slightly to the downside in the first two years, reflecting global factors. …when Bank Rate does begin to rise, it is expected to do so more gradually and to a lower level than in recent cycles.  This guidance is an expectation, not a promise.”

A statement by Governor Carney and subsequent press conference exuded confidence in the decision not to change policy settings.  He pointed to external developments are the most meaningful changes since the last meeting.  Carney clarified that the bank rate would be the cutting tool of policy normalization and opined that the Asset Purchase Program ceiling of GBP 375 billion is unlikely to be whittled down until the Bank Rate is at least back to 2.0%.

The quarterly Inflation Report, a 50-page document detailing the assumptions underlying the policy course, revises growth and inflation forecasts downward.  The fourth-quarter level of on-year inflation is projected to incline from 0.1% now to 1.2% a year from now, 2.1% in late 2017, and 2.2% in the final quarter of 2018.  A 3% decline in Chinese GDP growth is expected to dampen British growth by 0.3 percentage points.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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