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.
Tags: Bank of England
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