Thursday, September 15, 2016

BOE holds rate, still expects to cut despite upside data

    The Bank of England (BOE) left its benchmark Bank Rate at 0.25 percent, as widely expected, and confirmed that a majority of the members of its Monetary Policy Committee (MPC) still "expect to support a further cut in Bank Rate to its effective lower bound at one of the MPC's forthcoming meetings during the course of the year."
   "The MPC currently judges this bound to be close to, but a little above, zero," the BOE said.
    Although the U.K. central bank acknowledged that recent economic data had been "slightly to the upside" relative to its forecast from August, it added that the economic outlook was still largely as it expected following the surprising vote in June to leave the European Union (EU), known as Brexit.
    A full assessment of how the U.K. economy is adjusting to the uncertainty surrounding the future status of the U.K. outside the EU will take place as part of an update to forecasts in November.
    The MPC was unanimous in its vote to maintain the bank rate and also unanimous in its decision to continue with its package of measures agreed in August that aimed to help the U.K. economy adjust to what its governor, Mark Carney, described as a "regime change" outside the EU.
    It was the BOE's first rate cut since March 2009 and the package of measures included the purchase of up to 10 billion pounds of non-financial, investment grade sterling corporate bonds and a 60 billion pound expansion of its purchases of UK government bonds to a stock of 435 billion.
    The BOE said its rate cut and package of measures had led to a greater than expected boost to UK asset prices, with market interest rates falling though some of this has been reversed recently due to the higher than expected UK data and a general rise in global bond yields.
    The BOE said it had anticipated that business and consumer sentiment would bounce back following the immediate plunge in response to the Brexit vote, but acknowledged that it now expects less of a slowing in second half U.K. economic growth than it judged in August.
    But it is more difficult to infer anything from recent data for the economic outlook for 2017 and beyond, the BOE cautioned.
   In its August inflation report, the BOE forecast 2.0 percent growth in 2016, falling to 0.8 percent in 2017 and then an improvement to 1.8 percent in 2018. The Bank Rate was forecast to average 0.3 percent in the third quarter of this year and then be lowered to 0.1 percent by the third quarter of 2017 and remain at that level though Q3 2018 before rising to 0.2 percent in Q3 2019.
    The U.K.'s Gross Domestic Product expanded by an annual rate of 2.2 percent in the second quarter of this year, up from 2.0 percent in the first quarter and 1.8 percent in the fourth quarter of 2015.
    Inflation in August was unchanged at a rate of 0.6 percent from July, slightly below expectations and still well below the BOE's 2.0 percent target.
    After plunging up to 15 percent in the wake of the Brexit vote to below 1.30 to the U.S. dollar, sterling has been trading above that level in the last month as much of the recent economic data has been better than expected.
    In August, for example, consumer confidence improved to minus 7 in after a sharp fall to minus 12 in July while consumer spending in the same month rose by 6.2 percent after 6.3 percent in July.

    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 14 September 2016, the MPC voted unanimously to maintain Bank Rate at 0.25%.  The Committee voted unanimously to continue with the programme of sterling non-financial investment-grade corporate bond purchases totalling up to £10 billion, financed by the issuance of central bank reserves.  The Committee also voted unanimously to continue with the programme of £60 billion of UK government bond purchases to take the total stock of these purchases to £435 billion, financed by the issuance of central bank reserves.
The package of measures announced by the Committee at its August meeting led to a greater than anticipated boost to UK asset prices.  Short and long-term market interest rates fell notably following the announcement; corporate bond spreads narrowed, and issuance was strong; and equity prices rose.  Since then, some of the falls in yields have reversed, driven by somewhat stronger-than-expected UK data and a generalised rise in global yields.
Many banks announced cuts in Standard Variable Rate and Tracker mortgage rates in line with the cut in Bank Rate.  Deposit rates fell in August, although on average these falls were slightly smaller than the cut in Bank Rate.  Fixed rates on new mortgage lending also fell.  
Overall, while the evidence on the initial impact of the policy package is encouraging, the Committee will monitor closely changes in asset prices and in interest rates facing households and firms and their effect on economic activity.
The MPC set out its most recent detailed assessment of the economic outlook in the August Inflation Report.  Based on the data available at that time, the Committee judged that the UK economy was likely to see little growth in the second half of 2016.  In light of the tendency for survey indicators to overreact to unexpected events, the Committee expected some bounce-back in surveys of business and consumer sentiment following the sharp falls in the immediate aftermath of the vote to leave the European Union.  Nevertheless, since the August Inflation Report, a number of indicators of near-term economic activity have been somewhat stronger than expected.  The Committee now expect less of a slowing in UK GDP growth in the second half of 2016. 
It was more difficult to draw a strong inference from these data about the Committee’s projections for 2017 and beyond.  Moreover, there had been no new information since the August Inflation Report relevant for longer-term prospects for the UK economy.  
In the August Inflation Report, the Committee judged that some parts of the economy would be more sensitive than others to heightened uncertainty.  Business and housing investment were expected to decline in the second half of 2016, while consumption growth was expected to slow more gradually, alongside households’ real disposable incomes.  While most business investment intentions surveys weakened further since the August Inflation Report, the near-term outlook for the housing market is less negative than expected and the indicators of consumption have been a little stronger than expected.  Overall, these data remain consistent with the Committee’s judgement in the August Inflation Report that business spending would slow more sharply than consumer spending in response to the uncertainty associated with the United Kingdom’s vote to leave the European Union.  
Data on global economic activity have generally been in line with the Committee’s August Inflation Report projections, with growth in the United Kingdom’s major trading partners expected to continue at a modest pace over the next three years. 
Twelve-month CPI inflation remained at 0.6% in August, lower than projected at the time of the August Inflation Report, and well below the 2% inflation target.  As the unusually large drags from energy and food prices attenuate, CPI inflation is expected to rise to around its 2% target in the first half of 2017, consistent with the August Inflation Report, albeit with the projection a little lower over the remainder of 2016 than had been anticipated in August.  
The Committee’s view of the contours of the economic outlook following the EU referendum had not changed. News on the near-term momentum of the UK economy had, however, been slightly to the upside relative to the August Inflation Report projections. The Committee will assess that news, along with other forthcoming indicators, during its November forecast round.  If, in light of that full updated assessment, the outlook at that time is judged to be broadly consistent with the August Inflation Report projections, a majority of members expect to support a further cut in Bank Rate to its effective lower bound at one of the MPC’s forthcoming meetings during the course of this year.  The MPC currently judges this bound to be close to, but a little above, zero.
Against that backdrop, at its meeting ending on 14 September, MPC members judged it appropriate to leave the stance of monetary policy unchanged."


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