Cascade Commentary

Bank of England maintains Bank Rate at 0.75% as Inflation remains at 2.0%

August 2019

At its meeting ending 31st July 2019, the Bank of England’s Monetary Policy Committee (MPC) voted unanimously to maintain both Bank Rate at 0.75% and the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion. The MPC also 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.

In order to maintain price stability, the Government sets an annual inflation target of 2.0% for the MPC, as measured using the Consumer Prices Index (CPI). The MPC is required to adjust monetary policy in a way that will achieve this target level while also supporting the Government’s objectives for employment and growth. The Inflation Report is produced quarterly by the Bank of England with monthly reports from the Office of National Statistics to ensure a comprehensive and forward-looking discussion can be held by MPC members.

A tariff war between the US and China has continued weakening global trade as confidence and investment remains subdued. The European Central Bank (ECB) expects for global trade to remain lower in the coming quarters and the Bank of England shared the same view in the minutes from its 31st July 2019 meeting. 

In addition to softer economic data globally, the MPC highlighted the increased probability of a “no-deal” Brexit has lowered UK interest rates and led to a depreciation of the sterling exchange rate. Continued uncertainty surrounding the UK’s exit from the European Union (EU) is generating challenging economic conditions domestically with stockbuilding increasing the volatility of UK data. 

GDP growth in the UK was only 0.5% in Q1 of 2019 while it remained flat in Q2, slightly weaker than had been expected at the May 2019 MPC meeting. The labour market has remained tight with relatively strong annual pay growth reported. CPI inflation is on target at 2.0% with core CPI inflation slightly below-target at 1.8%.

The August Inflation Report updated the Bank of England’s projections, continuing with an expectation for a smooth adjustment to an average of the range of possible outcomes for the UK’s new trading relationship following its exit from the EU. In the near-term, a margin of excess supply is assumed over the first year of projections before picking up thereafter as both global growth and UK growth are expected to recover as global trade tensions soften and the UK benefits from stronger investment as Brexit uncertainties dissipate. Based on these projections, inflation is expected to exceed the 2.0% target reaching 2.4% by the end of the three-year forecast period.

Difficulty persists in producing accuracy in economic forecasts as the range of potential outcomes for the UK’s exit from the EU remain vast. Setting monetary policy therefore will be closely adjusted and conditional upon the effects of Brexit upon demand, supply and the sterling exchange rate. The MPC indicated in minutes from its July 2019 meeting that monetary policy could now move in either direction and will be set appropriately to maintain a 2.0% target inflation level while balancing the impact on growth and employment levels.

Future interest rate increases were still listed as a possibility, at a gradual pace and to a limited extent, dependent on the path followed as we approach the 31st October 2019 Brexit deadline. The MPC next meets in September with minutes released on 19th September 2019.

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