Thursday, July 14, 2016

BOE leaves rate on hold but expects to ease in August

    The Bank of England (BOE) left its benchmark Bank Rate and its asset purchase program unchanged but said it expects to ease its monetary policy stance next month when its Monetary Policy Committee (MPC) has concrete data on how the outlook for the economy has changed following last month's vote to leave the European Union (EU).
    The decision will have surprised roughly half of the economists surveyed who had expected the BOE at this meeting to either cut its 0.50 percent rate for the first time since March 2009 or boost its 375 billion pound asset purchase program. The other half of economists surveyed expected the BOE to wait until August.
    Although the BOE acknowledged that preliminary data showed "economic activity is likely to weaken in the near term" and the fall in pound sterling will boost inflation, it added that official data were not yet available since the June 23 EU referendum and it will spend the next month considering how the economic outlook has changed and its various easing options for supporting growth.
    "The MPC is committed to taking whatever action is needed to support growth and to return inflation to the target over the appropriate horizon," the MPC said, adding that "to that end, most members of the Committee expect monetary policy to be loosed in August."
    However, the BOE also said that it may act sooner than August if there is a sudden worsening in the prospects for economic growth and inflation.
    The day after the vote, when the exchange rate of the pound plunged and Prime Minister David Cameron announced he would step down, BOE Governor Mark Carney went on television to emphasize that the he would ensure that the financial system continued to function and the BOE would provide an extra 250 billion of funds to banks if they ran short.
     Policymakers worldwide also reflected lessons learnt from the 2008-2009 global financial crises, with central banks from as far away as Mauritius and Kenya to the U.S. Federal Reserve pledging their readiness to intervene in markets or provide dollars to avoid a financial crises.
     The BOE today noted that financial markets had "functioned well" in response to the vote and the flexibility its regulations had allowed the impact to be dampened rather than amplified.
     On Aug. 4 the BOE will update its inflation report.
    In its report from May, the BOE trimmed its 2016 growth forecast to 2.0 percent from February's forecast of 2.2 percent, the 2017 forecast to 2.3 percent from 2.4 percent and the 2018 forecast to 2.34 percent from 2.5 percent.
    At the latest meeting of the 9-member MPC, only Gertjan Vlieghe voted for an immediate 25-basis point cut to Bank Rate, the first time since February the committee was not unanimous in its decision.
    Despite the lack of data, the BOE said there are already signs that business and consumer confidence has taken a hit since the vote to leave the EU - known as Brexit - with surveys showing that some businesses are delaying investment projects and postponing hiring decisions while the housing market point to a "significant weakening."
    On June 30 BOE Governor Mark Carney said he and his colleagues would not hesitate to act to safeguard the economy or the financial system and that it was possible that uncertainty could remain elevated for some time.
    "The economic outlook has deteriorated and some monetary policy easing will likely be needed over the summer," Carney said.
    The most immediate reaction to the uncertainty surrounding the United Kingdom following the vote to leave the EU - it now faces at least two years of negotiating new trade deals, both with the EU and other countries - has been by currency markets.
    The exchange rate of the pound fell swiftly in reaction to the vote but firmed slightly in response to today's decision to maintain the rate. The pound rose to 0.747 to the U.S. dollar immediately after the decision but later eased to trade at 0.752. Compared with its rate of 0.675 prior to the vote, the pound is down 10.2 percent and 9.7 percent since the start of this year.
   The effective exchange rate of the pound is down by 6 percent since the previous meeting of the MPC on June 16, the BOE said, adding that longer-term interest rates have declined.
   The fall in the pound will put upward pressure on inflation as importers pass on their higher prices to consumers. Inflation expectations have already risen, but the MPC said only short-term inflation expectations had risen moderately and only to around historical averages. Longer-term, inflation expectations had actually fallen.
    May inflation in the UK was stable at 0.3 percent, well below the BOE's 2.0 percent target, due to the large drags from energy and food prices that are expected to dissipate during next year.

    The Bank of England issued the following statement:
"The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target and in a way that helps to sustain growth and employment.  At its meeting ending on 13 July 2016, the MPC voted by a majority of 8-1 to maintain Bank Rate at 0.5%, with one member voting for a cut in Bank Rate to 0.25%.  The Committee voted unanimously to maintain the stock of purchased assets financed by the issuance of central bank reserves at £375 billion.  Committee members made initial assessments of the impact of the vote to leave the European Union on demand, supply and the exchange rate.  In the absence of a further worsening in the trade-off between supporting growth and returning inflation to target on a sustainable basis, most members of the Committee expect monetary policy to be loosened in August.  The precise size and nature of any stimulatory measures will be determined during the August forecast and Inflation Report round.
Financial markets have reacted sharply to the United Kingdom’s vote to leave the European Union.  Since the Committee’s previous meeting, the sterling effective exchange rate has fallen by 6%, 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.
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% in May and remains well below the 2% inflation target.  Measures of core inflation have been stable at a little over 1%.  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 in its May Inflation Report, and again in the minutes of its June meeting, that a vote to leave the European Union could have material implications for the outlook for output and inflation.  The Committee judges that a range of influences on demand, supply and the exchange rate could lead to a significantly lower path for growth and a higher path for inflation than in the central projections set out in the May Report.  The Committee 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.
The MPC is committed to taking whatever action is needed to support growth and to return inflation to the target over an appropriate horizon.  To that end, most members of the Committee expect monetary policy to be loosened in August.  The Committee discussed various easing options and combinations thereof.  The exact extent of any additional stimulus measures will be based on the Committee’s updated forecast, and their composition will take account of any interactions with the financial system.
Against that backdrop, at its meeting ending on 13 July, the majority of MPC members judged it appropriate to leave the stance of monetary policy unchanged at present.  Gertjan Vlieghe preferred to reduce Bank Rate by 25 basis points at this meeting."


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