Bank of England

February 8, 2018

As had been expected, the Monetary Policy Committee by unanimous consent did not change policy settings. The Bank Rate has been 0.50% since being doubled three months ago in a move that reversed the 25-basis point cut in August 2016 shortly after Brexit was approved narrowly by citizen referendum. Ceilings of GBP 435 billion on purchases of government fixed income securities and GBP 10 billion on corporate bond holdings were also not changed. Brexit remains a problem. It depressed growth and raised inflation. But those effects were less extreme than initially expected, and today’s statement from the MPC, which was accompanied by a fresh quarterly Inflation Report, proved to be more hawkish in tone than expected. New macroeconomic forecasts have revised projected GDP growth this year to 1.7% from 1.5%. The newly assumed growth trend during the 3-year forecasting horizon of 1.75% per annum exceeds the likely growth of capacity by 1.5% per annum. Inflation is not likely to settle all the way back to target during the forecast period, all of which points to at least one more rate increase and earlier implementation of future rate increases than was implied in the November Inflation Report. In the statement’s own words, normalization will result in a higher rate path yet still be gradual overall.

Over the past year, a steady absorption of slack has reduced the degree to which it was appropriate for the MPC to accommodate an extended period of inflation above the target.  Consequently, at its November 2017 meeting, the Committee tightened modestly the stance of monetary policy in order to return inflation sustainably to the target.

Since November, the prospect of a greater degree of excess demand over the forecast period and the expectation that inflation would remain above the target have further diminished the trade-off that the MPC is required to balance.  It is therefore appropriate to set monetary policy so that inflation returns sustainably to its target at a more conventional horizon.  The Committee judges that, were the economy to evolve broadly in line with the February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November Report, in order to return inflation sustainably to the target.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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