Bank of England

December 10, 2015

Policy was again left unchanged by the nine-member Monetary Policy Committee.  The Bank Rate has been 0.5% since March 2009.  Only Ian McCafferty voted to raise such, as he also did at the four prior monthly MPC meetings.  The GBP 375 billion asset purchase program was last raised in July 2012 and reached by the following November.  A released statement today notes that inflation is presently a bit over 2 percentage points under target and unlikely to rise to 1% until after mid-2016.  The statement observes that “measures announced in the Government’s Autumn Statement mean a slightly lower pace of deficit reduction in 2016 than was previously planned, although the fiscal consolidation will continue to weigh on growth over the forecast period.”  Furthermore,”the projected return of CPI inflation to the target depends on an increase in domestic cost growth sufficient to balance the drag on prices from very subdued global inflation and past increases in the value of sterling.”  Despite McCafferty’s preference to begin rate normalization now rather than later, “all members agree that, given the likely persistence of the headwinds weighing on the economy, when Bank Rate does begin to rise, it is expected to do so more gradually and to a lower level than in recent cycles.”  In other words, the new appropriate long-term normal central bank interest rate consistent with full employment lies below where such was in previous monetary policy cycles.  This important change is true in many other economies, too, including Euroland, the United States and Japan.  A first interest rate hike in the U.K. seems unlikely before mid-2016.

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



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