BoE holds rates for now, may ease monetary policy in August

14 Jul 2016


The Bank of England's Monetary Policy Committee (MPC) at its monetary policy to meeting today decided to keep policy rates unchanged, targeting a 2 per cent inflation, and in way that helps to sustain growth and employment. 

The committee also proposed a further loosening of monetary policy next month after a proper assessment of the evolving situation.

At its meeting ending on 13 July 2016, the MPC voted by a majority of 8-1 to maintain bank rate at 0.5 per cent, with one member voting for a cut in bank rate to 0.25 per cent.  The committee voted unanimously to maintain the stock of purchased assets financed by the issuance of central bank reserves at £375 billion. 

The committee made initial assessments of the impact of the vote to leave the European Union on demand, supply and the exchange rate and decided that in the absence of a further worsening in the trade-off between supporting growth and returning inflation to target on a sustainable basis, proposed a monetary policy loosening in August. 

''The precise size and nature of any stimulatory measures will be determined during the August forecast and inflation report round,'' BoE stated in a release.

Financial markets have reacted sharply to the UK's vote to leave the European Union.  Since the committee's previous meeting, the sterling's effective exchange rate has fallen by 6 per cent, and short-term and longer-term interest rates have declined. 

''Reflecting the fall in the level of sterling, financial market measures of inflation expectations have risen moderately at short-term horizons, but only to around historical averages, and have fallen slightly at longer horizons.  Markets have functioned well, and the improved resilience of the core of the UK financial system and the flexibility of the regulatory framework have allowed the impact of the referendum result to be dampened rather than amplified,'' BoE noted.

BoE said official data on economic activity covering the period since the referendum are not yet available.  However, there are preliminary signs that the result has affected sentiment among households and companies, with sharp falls in some measures of business and consumer confidence.  ''Early indications from surveys and from contacts of the Bank's agents suggest that some businesses are beginning to delay investment projects and postpone recruitment decisions.  Regarding the housing market, survey data point to a significant weakening in expected activity. Taken together, these indicators suggest economic activity is likely to weaken in the near term.''

Twelve-month CPI inflation was 0.3 per cent in May and remains well below the 2 per cent inflation target.  Measures of core inflation have been stable at a little over 1 per cent. The shortfall in headline inflation is due predominantly to unusually large drags from energy and food prices, which are expected to attenuate over the next year. In addition, the sharp fall in the exchange rate will, in the short run, put upward pressure on inflation as the prices of internationally traded commodities increase in sterling terms, and as importers pass on increases in their costs to domestic prices.

Looking further forward, the MPC made clear it will consider over the coming period how the outlook for the economy has changed in light of the referendum result and will publish its new forecast in its forthcoming inflation report on 4 August.

Euro zone bond yields rose on Thursday after the Bank of England wrong-footed investors by holding interest rates steady at its first meeting since Britain's vote to leave the EU last month.

While the BoE said it was likely to deliver stimulus soon, markets had been priced for the first cut in more than seven years as Britain's economy reels from last month's Brexit vote. Sterling, British and other benchmark bond yields rose after the decision, as stocks fell.

BoE meetings have in recent years had little impact on the continent, especially as the Bank has held interest rates steady since 2009, but the uncertainty Brexit has layered on top of stuttering global growth could require another round of stimulus from major central banks elsewhere.

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