Bank of England: No Policy Changes, Downward Revisions to Projected Growth and Inflation, and a Dovish Message Overall

February 4, 2016

The Bank of England’s nine-person Monetary Policy Committee was unanimous for the first time in seven monthly meetings in voting not to raise, or lower, the 0.50% Bank Rate, which has been at that level since March 2009. Ian McCafferty had voted for a 25-basis point hike at the six previous meetings.  Policymakers released a summary statement of its findings at this week’s meeting and also published the latest quarterly Inflation Report with lower growth and inflation forecasts than contained in its November report.

British inflation, 0.2% as of December, continues to be depressed more subdued domestic wage pressures than anticipated, as well as the plunge in oil prices, strength of the pound in 2013-15, and slow global inflation.  Although expected inflation remains anchored, officials are closely watching for any evidence that the protracted spate of very low actual inflation doesn’t infect wage formation dynamics.  Inflation is expected to stay below 1%, half the target, for all of 2016 but to climb to slightly more than 2.0% by the end of the two-year policy horizon.  That said, the risk surrounding this baseline scenario is skewed to lower, not higher, inflation.  Officials reduced their GDP growth forecast for the current year to 2.2% from 2.5% and the projection regarding growth in 2017 to 2.3% from 2.6%.  CPI inflation a year from now is now thought to be 1.2%, not 1.5%, and at 2.1% two years.  The indicated likely Bank Rate level is 0.5% in 1Q17, followed by 0.8% in 1Q18 and only 1.1% in 1Q19.  For some time, the Bank of England, like the Fed, has warned that central bank rates in the coming rate hike cycle are likely to peak at a lower level than in previous cycles.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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