Bank of England Tightens a Second Time

August 2, 2018

Following up on an initial interest rate hike last November, the Monetary Policy Committee by unanimous vote raised Britain’s Bank rate from 0.50% to 0.75%, highest since March 2009. The policy governing the Bank of England’s holdings of gilts and corporate bonds was not changed, and a released statement gave the following forward guidance to future interest rate changes:

The Committee also judges that, were the economy to continue to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2% target at a conventional horizon. Any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent.

The interval between the first and second rate hikes was longer than expected back in November because officials wanted to be sure that the sharp slowdown in GDP growth last winter would prove temporary, and it has. Central bank officials expect British GDP over the policy forecast period to expand slightly faster than the potential trend and for this to result in the emergence of a widening condition of excess demand next year. The jobless rate will be depressed, and unit labor cost inflation will firm. Obviously, the coming Brexit deadline at end-2019 poses big uncertainties to the economic outlook — hence a cautious approach to rate normalization.

Further background information regarding the policy committee’s latest thinking can be found in the quarterly Inflation Report that was also published today.

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



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