The Bank of England's (BOE) Monetary Policy Committee (MPC) voted by 8-1 to maintain its bank rate at a record low of 0.5 percent, the first time since December 2014 that one of the MPC members has voted to raise rates.
In its statement, the central bank for the United Kingdom said all nine MPC members had agreed to maintain the stock of assets purchased by the issuance of bank reserves at 375 billion pounds and to reinvest 16.9 billion of cash from the redemption of September 2015 U.K. Treasury bonds.
As in recent months, the BOE repeated its oft-stated view that when the bank rate starts to rise, "it is expected to do so more gradually and to a lower level than in recent cycles," but qualified this by adding this guidance was "an expectation, not a promise."
"The actual path Bank Rate will follow over the next few years will depend on the economic circumstances," said the BOE in its first major statement following an MPC meeting, adding that inflation is expected to return to its target within two years and then move "slightly above" the target in the third year of its current forecast period as growth leads to excess demand.
In the past, the BOE has typically only published a brief statement with the outcome of its meetings and then followed by minutes of that meeting two weeks later. But starting today, the BOE will publish the outcome of its MPC meetings along with the minutes, giving investors more insight into its thinking and avoiding speculation about the reasons for the MPC's decisions.
In addition, the BOE today also published its quarterly inflation report, noting that risks to global growth were seen as "skewed moderately to the downside" while domestic demand in the UK was "robust and expected to remain so with wage growth beginning to pick up and investment rising.
"The likely timing of the first Bank rate increase is drawing closer," BOE Governor Mark Carney said in his statement to a press conference," adding that "the exact timing of the first move cannot be predicted in advance; it will be the product of economic developments and prospects. In short, it will be data dependent."
At the meeting concluded on Aug. 5, MPC member Ian McCafferty voted to raise the rate by 25 points, the first time since January he has voted with the majority to maintain rates. From August through December last year McCafferty and Martin Weale voted to raise the rate, arguing it should be raised before wages start to rise.
McCafferty returned to that view this month, arguing that "demand growth and wage pressures were likely to be greater, and the margin of spare capacity smaller, than embodied in the Committee's collective August projections."
In its policy statement, the BOE pointed to the impact of a 20 percent rise in the pound's exchange rate since its through in March 2013 and by 3.5 percent since May, keeping down import prices and thus pushing down inflation. In addition, the fall in energy prices in the past few months will continue to hold down inflation at least until the middle of 2016.
Set against what the BOE described as a "muted" outlook for near-term inflation, the degree of slack in the economy has "diminished substantially over the past two and a half years" as unemployment has fallen by more than 2 percentage points since mid-2013.
The BOE judged that the margin of spare capacity was around 0.5 percent of economic output and a "further modest tightening of the labour market is expected, supporting a continued firming in the growth of wages and unit labour costs over the next three years, counterbalancing the drag on inflation from sterling."
Headline inflation in the UK was zero in June, down from 0.1 percent in May but up from minus 0.1 percent in April, well-below the BOE's 2.0 percent target. The BOE estimates that around 1.5 percentage points of the deviation in inflation from its target is due to low "unusually" low prices of energy, food and other imports, while 0.5 points "reflects the past weakness of domestic cost growth, and unit labour costs in particular."
The Bank of England published the following statement: