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February BoE Meeting: Three Things You Should Know

The Bank of England’s (BoE) monetary policy meeting held on Thursday was the first this year. As widely expected the central bank held back from making changes to interest rates or to the bank’s asset purchases.

The central bank also released its quarterly inflation report.

Here are five key takeaways from the Bank of England’s meeting yesterday.

1. BoE leaves monetary policy unchanged

The Bank of England monetary policy committee (MPC) voted at its meeting on Thursday to leave interest rates unchanged at 0.25%, while keeping the asset purchase program steady at GBP435 billion. This was widely expected by economists. The BoE’s monetary policy statement continued to reflect the central bank’s neutral stance on interest rates, despite evidence of an uptick in inflation over the past few months.

Implied Future Inflation Rates (Source: BoE)

The central bank has also communicated its tolerance to inflation overshooting the 2% target rate, although some MPC members said that they will tolerate only a “little room” for inflation to overshoot its limits. This could possibly mean that if inflation continues to rise above 2% there will be some dissenters along the way who are likely to vote in favor of a rate hike or at the very least call for an end to the BoE’s asset purchase program.

2. BoE Raises Growth Forecasts for 2017

The central bank’s MPC gave an upgraded view of the economy for 2017, raising growth forecasts from 1.4% to 2.0% including lifting its growth projections for 2018 and 2019. Growth is expected to slow to 1.8% in 2018 and then fall to 1.6% by 2019, according to the estimates.

Output growth and bank staff’s projections (Source: BoE)

However, the central bank left inflation forecasts unchanged expecting inflation to run above 2% until 2020. The British pound is down 20% since the pre-Brexit levels but managed to bounce off the lows. The central bank expects the exchange rate weakness to propel inflation higher and expects an overshoot to as much as 2.7%.

The BoE lowered its estimates on the unemployment rate which it expects can be sustained without generating any wage pressures that could push inflation higher to around 5%. Policy makers are however doubtful on how quickly the economy will grow without prompting a rate hike.

“The more time that passed without a noticeable reduction in economic growth, the more difficult it would become to tolerate the extent of the inflation overshoot,” the MPC members said.

3. What can prompt the BoE to change interest rates?

BoE officials gave some details on what could cause a shift from the current neutral stance.

To the upside, warranting a rate hike, the BoE highlighted that if wage growth picks up more than anticipated, it could tighten monetary policy. So far, the central bank is expecting that the additional slack in the labor market will compensate for any wage rises which could limit the inflation pressures that come as a result of the British pound’s exchange rate.

While upgrading its view on consumer spending and housing investment, the central bank expects spending to slow on account of higher prices, which could eat into the disposable incomes. The central bank said that if spending growth shows signs of slowing more abruptly than expected, there was scope for loosening monetary policy further.

It is hard to foresee further rate cuts from the central bank as the BoE governor Mark Carney had previously ruled out negative interest rates and said he did not prefer zero-percent interest rates either.

The BoE’s monetary policy decision showed that the central bank will remain on the sidelines at least until U.K. Prime Minister will trigger the Article 50 to begin negotiations with the EU. PM Theresa May got the go ahead by British MP’s this week, who voted with a majority for the Prime minister to go ahead with triggering Article 50.

The move was prompt after the U.K.’s Supreme Court ruled earlier in January that the Parliament must put the Article 50 to a vote. This quickly led to the British government quickly tabling the bill within a few days of the verdict.

Orbex Review

Friday, 03 Feb, 2017 / 9:01

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