MPC leaves Bank Rate at 0.25% and QE Unchanged
The Bank of England announced yesterday that the Monetary Policy Committee (MPC) had voted to leave interest rates unchanged at the historic low of 0.25%. The MPC also agreed to leave their existing quantitative easing policy unchanged. This policy pumps money into the economy by the issuance of central bank reserves used to purchased £435bn of government bonds and up to £10bn of corporate bonds.
For the first time in 8 months, the decision for monetary policy to continue unchanged was split with a 8-1 vote. Kristin Forbes voted against the decision considering it appropriate to increase interest rates by 0.25%. In the minutes released, Kristin indicated that rising inflation should not be tolerated any longer indicating that growth has not slowed as expected and is likely to be supported by other components, such as net exports.
Despite Kristin’s views, the majority of the committee felt that growth in consumer spending had shown signs of a slowdown while wage growth was also sluggish to-date. Official data released on Wednesday reported that real UK pay growth has halved to just 0.7% - its lowest since October 2014.
The MPC next meets in May 2017, announcing their update and minutes on Thursday 11 May.
Commentary
The economy has performed better than expected since the Brexit vote in June 2016, largely buoyed by the fall in sterling and the immediate support of the Bank of England in August 2016. For a rate rise to occur, the MPC needs the support of at least five MPC members. The minutes released indicate Ms Forbes is not alone in her concern over rising inflation and the conditions required for a rate rise, with a close eye being kept on how inflation rises in the months to come.
We have seen much speculation of a rate increase since the base rate was reduced to 0.50% in 2009, and were closest to this happening in 2011 when three MPC members voted for an increase. However, with the uncertainty that is now present, the decision to do so is not so clear cut and will depend on many factors, including how inflation filters into wage growth.
In regards to rates over the last 3 months, our forthcoming quarterly report indicates bigger moves in longer term rates. Banks and building societies are needing to compensate depositors more to incentivise them to lock in for longer. The best rates available earlier this week on a 5 year fixed term for a private client were 0.45% greater than they were on January 4th earlier this year. The speculation for a rate rise is causing savers to opt for the shorter-term rates to have the flexibility to take advantage of a rate rise amidst rising inflation and the fall in sterling.
We will keep you abreast of this moving forward. Should you wish for a rates bulletin to look at rates available today, do let us know and we’ll be happy to assist.