Bank of England challenges monetary orthodoxy

Bank of England challenges monetary orthodoxy

Andrew Cummings
December 15, 2017

The Bank of England kept its key interest rate at 0.5 percent at its final meeting of the year, it said Thursday while keeping an eye on Britain's Brexit-fuelled inflation.

Unemployment was expected to remain low throughout the three-year forecast period, and domestic inflationary pressures were projected to pick up gradually as remaining spare capacity was absorbed and wage growth recovered.

Inflation hit 3.1 per cent in November, the Office for National Statistics reported this week. Currently, it would appear that uncertainty around the UK's weak economic growth and unwillingness to disrupt strong employment figures are the main reasons for a lack of action. In the medium term, policymakers believed that inflation would "decline towards the 2% target", as it is approaching the peak now. The central bank noted that GDP growth in the fourth quarter might be slightly softer than the third quarter. The measures announced in the Autumn Budget will lessen the drag on aggregate demand stemming from fiscal consolidation, relative to previous plans. "We put this down to the emphasis that the market continues to place on the Brexit negotiation as the key variable in shaping United Kingdom rate expectations".

The Governing Council expects the key European Central Bank interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases'.

The figure was the highest level on record since March 2012 and will force BoE governor Mark Carney to write a letter to the chancellor explaining why price growth is so far above the BoE's 2% target.

"This will be a particularly important meeting, as not only does it come alongside the next inflation report, but it is also when the MPC carries out its annual supply-side stock take". Any future increases in Bank Rate are expected to be at a gradual pace and to a limited extent.

Both financial markets and economists expect BoE officials will wait almost a year before raising interest rates again - a much slower pace of tightening than the U.S. Federal Reserve, which raised rates again on Wednesday.

"With the MPC having moved to eight meetings per year, the next policy meeting will be in February. The Committee will monitor closely the incoming evidence on the evolving economic outlook, including the impact of last month's increase in Bank Rate, and stands ready to respond to developments as they unfold to ensure a sustainable return of inflation to the 2% target".

Other reports by iNewsToday