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 1 November 2017, the MPC voted by a majority of 7-2 to
increase Bank Rate by 0.25 percentage points, to 0.5%. 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’s outlook for inflation and activity in the November Inflation Report is broadly similar to its projections in August. In the MPC’s central forecast, conditioned on the gently rising path of Bank Rate implied by current market yields, GDP grows modestly over the next few years at a pace just above its reduced rate of potential. Consumption growth remains sluggish in the near term before rising, in line with household incomes. Net trade is bolstered by the strong global expansion and the past depreciation of sterling. Business investment is being affected by uncertainties around Brexit, but it continues to grow at a moderate pace, supported by strong global demand, high rates of profitability, the low cost of capital and limited spare capacity.
inflation rose to 3.0% in September. The MPC still expects inflation to
peak above 3.0% in October, as the past depreciation of sterling and recent
increases in energy prices continue to pass through to consumer prices.
The effects of rising import prices on inflation diminish over the next few
years, and domestic inflationary pressures gradually pick up as spare capacity
is absorbed and wage growth recovers. On balance, inflation is expected
to fall back over the next year and, conditioned on the gently rising path of
Bank Rate implied by current market yields, to approach the 2% target by the
end of the forecast period.
in previous Reports, the MPC’s projections are conditioned on the average of a
range of possible outcomes for the United Kingdom’s eventual trading
relationship with the European Union. The projections also assume that,
in the interim, households and companies base their decisions on the
expectation of a smooth adjustment to that new trading relationship.
decision to leave the European Union is having a noticeable impact on the
economic outlook. The overshoot of inflation throughout the forecast
predominantly reflects the effects on import prices of the referendum-related
fall in sterling. Uncertainties associated with Brexit are weighing on
domestic activity, which has slowed even as global growth has risen
significantly. And Brexit-related constraints on investment and labour
supply appear to be reinforcing the marked slowdown that has been increasingly
evident in recent years in the rate at which the economy can grow without
generating inflationary pressures.
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. It can, however, support the economy during the adjustment process. 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 steady erosion of slack has reduced the degree to which it is appropriate for the MPC to accommodate an extended period of inflation above the target. Unemployment has fallen to a 42-year low and the MPC judges that the level of remaining slack is limited. The global economy is growing strongly, domestic financial conditions are highly accommodative and consumer confidence has remained resilient. In line with the framework set out at the time of the referendum, the MPC now judges it appropriate to tighten modestly the stance of monetary policy in order to return inflation sustainably to the target. Accordingly, the Committee voted by 7-2 to raise Bank Rate by 0.25 percentage points, to 0.5%. Monetary policy continues to provide significant support to jobs and activity in the current exceptional circumstances. All members agree that any future increases in Bank Rate would be expected to be at a gradual pace and to a limited extent.
remain considerable risks to the outlook, which include the response of
households, businesses and financial markets to developments related to the
process of EU withdrawal. The MPC will respond to developments as they
occur insofar as they affect the behaviour of households and businesses, and
the outlook for inflation. The Committee will monitor closely the
incoming evidence on these and other developments, including the impact of
today’s increase in Bank Rate, 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.
For More Rolling coverage of the Bank of England’s eagerly awaited decision on interest rates:
Source: The Guardian UK