Bank of England leaves monetary policy unchanged in August meeting
The vote to leave the European Union (EU) in June 2016 and the ongoing transition to a new trading paradigm continues to discourage corporate investment and household spending, said the Bank of England in the latest minutes from its Monetary Policy Committee (MPC) meeting.
Policymakers voted 6 to 2 to maintain interest rates at 0.25% detailing the ongoing trade-off between the tightening of monetary policy to restrain inflation and the support of a loose monetary policy for income growth and higher employment. The Committee also voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases at £10 billion and the stock of UK government bond purchases at £435 billion, where both are financed by the issuance of central bank reserves.
Despite voting to maintain monetary policy for now, the minutes do suggest that if the UK economy follows a path broadly consistent with the August projections, then a tightening beyond current expectations may be required. Markets are currently pricing in interest rate rises over the next three years from 0.25% to 0.50% before reaching 0.75%.
The August projections detailed revised economic forecasts, which now stand as follows:
- GDP growth is now expected to be 1.7% in 2017, down from the 1.9% that was predicted in May 2017;
- GDP growth in 2018 is now expected to be 1.6%, down from the 1.7% that was predicted in May 2017, with no change to the 2019 growth prediction of 1.8%;
- Inflation in the third quarter of this year is expected to average 2.7%, up from the 2.6% predicted in May 2017;
- Average earnings growth forecasts are unchanged from May 2017 at 2% in 2017, but 2018 earnings growth expectations have been cut to 3% from 3.5% and 2019’s to 3.25% from 3.75%.
Commentary
The latest minutes report a persistent concern over the high level of uncertainty present in economic markets following the UK's decision to leave the EU. This uncertainty has had the impact of delaying corporate investment and household spending as market participants look to wait and see how the new trading relationship between the two will now evolve.
Such uncertainty has led to sluggish wage growth, which, when coupled with higher inflation, has placed a squeeze on household incomes. The good news is that the effect of rising import prices on inflation is expected to diminish, and as this occurs, domestic inflationary pressures should gradually pick up over the forecast period. At this point, wage growth is projected to recover providing a bit of support for increased household spending.
The immediate impact of the Brexit vote saw a substantial depreciation of sterling that simultaneously raised import prices, which have slowly journeyed through the supply chain to reach consumers. The MPC minutes explain the overshoot of inflation both now and in released projections to be wholly accounted for by import inflation. This continued pass-through to consumers is expected to continue for a few years until completion such that high inflation above the 2% target will remain.
The Monetary Policy Committee next meet on September 13th with the minutes and decisions announced on September 14th. Should you wish to discuss how to position your cash portfolio for the coming period, please do let us know by contacting a member of our team on 0191 481 3777 and we'll be happy to assist.