Thursday, June 15, 2017

BOE maintains rate but 3 MPC members vote to hike

     The Bank of England (BOE) left its key interest rate, along with its stock of assets, unchanged but moved closer toward tightening its monetary policy stance as three of the eight members of its monetary policy committee (MPC) voted to immediately raise the bank rate by 25 basis points as inflation has picked up and is expected to remain above target for the next three years.
      In the wake of Britain's surprise decision to leave the European Union (EU), the BOE in August 2016 slashed its rate by 25 basis points to the current level of 0.25 percent, the first rate cut since March 2009, and launched a package of stimulus measures to cushion the economy from the uncertainty surrounding its future status outside the EU.
       But consumer spending and economic activity held up much better than the BOE had expected and in March and then in May MPC member Kristen Forbes voted to raise rates. She argued inflation was accelerating due to the fall in the exchange rate of pound and price pressures were rising.
       Forbes, who yesterday attended her last MPC meeting, has now been joined by Ian McCafferty and Michael Saunders in calling for a higher rate.
      But all eight MPC members voted to maintain the BOE's stock of 10 billion pounds of corporate bonds and its stock of 435 billion pounds of UK government bonds.
       In May, when the BOE last updated its inflation report, the bank still expected "a small degree of spare capacity," in the economy and this would justify a certain tolerance by the central bank of inflation in excess of its 2 percent target.
       But today the BOE said rising employment suggested "spare capacity is being eroded," adding pointedly that this is "reducing the MPC's tolerance of above-target inflation," a clear reference to growing unease over accelerating inflation.
       "Looking ahead, key considerations in judging the appropriate stance of monetary policy are the evolution of inflationary pressures, the persistence of weaker consumption and the degree to which it is offset by other components of demand," the BOE said, signaling that it will rely on incoming data in coming months to determine its policy decisions.
       Headline inflation rose to 2.9 percent in May from 2.7 percent in April, above the BOE's expectation, and could rise above 3 percent by the fall and remain above target for an extended period as the impact of a lower pound continues to push up import prices and thus inflation, BOE said.
       Following the June 2016 vote to leave the EU, the pound fell sharply and hit a low of 0.83 to the U.S. dollar in mid-January. Since then it has firmed slightly though it has fallen 2.5 again since the May meeting by the BOE, a move that will add to "imported inflationary impetus," BOE said.
       Today the pound was trading at 0.78 to the U.S. dollar, up 3.8 percent this year but down around 13 percent since the day before the EU vote, known as Brexit.
      After holding up much better than expected last year, the UK economy has softened in recent months as household spending has weakened, with falling new car registrations and a slowing housing market.
     "It remains to be seen how large and persistent this slowdown in consumption will prove," the BOE said, adding that consumer confidence remains resilient and employment has continued to rise, and surveys suggest a modest recovery of growth in the second quarter.
      The UK unemployment rate was steady at 4.7 percent in the three months to April while the annual growth in Gross Domestic Product was 2.0 percent in the first quarter of this year, up from 1.9 percent in the previous quarter.
      In May the BOE lowered its 2017 growth forecast to 1.9 percent from February's forecast of 2.0 percent and projected that the bank rate would be raised to 0.3 percent by the second quarter of next year, then 0.4 percent in Q2 2019 and 0.5 percent by Q2 2020.
      Inflation was forecast at 2.7 percent in the second quarter of this year, then 2.6 percent in the second quarter of 2018, 2.2 percent in Q2 2019 and 2.3 percent in the second quarter of 2020.


       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 June 2017, the MPC voted by a majority of 5-3 to maintain Bank Rate at 0.25%.  The Committee voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion.  The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.
The MPC set out its most recent assessment of the outlook for inflation and activity in the May Inflation Report.  That assessment depended importantly on three main judgements:  that the lower level of sterling continues to boost consumer prices broadly as projected, and without adverse consequences for inflation expectations further ahead;  that regular pay growth remains modest in the near term but picks up significantly over the forecast period;  and that more subdued household spending growth is largely balanced by a pickup in other components of demand. 
CPI inflation has been pushed above the 2% target by the impact of last year’s sterling depreciation.  It reached 2.9% in May, above the MPC’s expectation.  Inflation could rise above 3% by the autumn, and is likely to remain above the target for an extended period as sterling’s depreciation continues to feed through into the prices of consumer goods and services.  The 2½% fall in the exchange rate since the May Inflation Report, if sustained, will add to that imported inflationary impetus.
In contrast, pay growth has moderated further from already subdued rates, even as the unemployment rate has fallen to 4.6%, its lowest in over 40 years.
GDP growth declined markedly in the first quarter, in part reflecting weaker household spending.  It remains to be seen how large and persistent this slowdown in consumption will prove.  In recent months, there have been further signs of a slowing housing market and new car registrations have fallen sharply.  Consumer confidence has remained relatively resilient, however, and employment has continued to rise.  Outside the household sector, export indicators have strengthened, probably reflecting both the depreciation of sterling and increasingly robust global demand.  Most surveys of investment intentions have remained above their historic averages.  Surveys of general business activity suggest a modest recovery in GDP growth in the second quarter.
Monetary policy cannot prevent either the necessary real adjustment as the United Kingdom moves towards its new international trading arrangements or the weaker real income growth that is likely to accompany that adjustment over the next few years.  Attempting to offset fully the effect of weaker sterling on inflation would be achievable only at the cost of higher unemployment and, in all likelihood, even weaker income growth.  For this reason, the MPC’s remit specifies that, in such exceptional circumstances, the Committee must balance any trade-off between the speed at which it intends to return inflation sustainably to the target and the support that monetary policy provides to jobs and activity.
The projections that the Committee published in May showed that the economy was expected to operate with a small degree of spare capacity for most of the three-year forecast period, justifying the tolerance of some degree of above-target inflation.  The continued growth of employment could suggest that spare capacity is being eroded, lessening the trade-off that the MPC is required to balance and, all else equal, reducing the MPC’s tolerance of above-target inflation.  Looking ahead, key considerations in judging the appropriate stance of monetary policy are the evolution of inflationary pressures, the persistence of weaker consumption and the degree to which it is offset by other components of demand.
In light of these considerations, five members thought that the current policy stance remained appropriate to balance the demands of the MPC’s remit.  Three members considered it appropriate to increase Bank Rate by 25 basis points.  All members agreed that any increases in Bank Rate would be expected to be at a gradual pace and to a limited extent.  The Committee will continue to monitor closely the incoming evidence, and stands ready to respond to changes in the economic outlook as they unfold to ensure a sustainable return of inflation to the 2% target."





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