United Kingdom: BoE leaves rates unchanged in December
December 11, 2015
At its 11 December meeting, the Monetary Policy Committee (MPC) of the Bank of England (BoE) decided to keep the Bank Rate unchanged at 0.50% and to leave the stock of asset purchasing at GBP 375 billion, as the markets had expected. In the last five meetings, including the one in December, the same one member of the nine-member Committee has continuously voted in favor of increasing the Bank Rate by 25 basis points. Conversely, the other members have seen the current rate as appropriate considering the inflation outlook as well as the current state of the economy. The Committee voted unanimously on the proposal to leave the stock of asset purchasing unchanged.
In its analysis of domestic conditions, the BoE commented that in the third quarter, the economic performance was robust as resilient private domestic demand more than offset subdued external demand. On a sector level, services and energy output expanded in Q3 while output growth in the construction and manufacturing sectors disappointed. The Bank also commented that more recent data suggest that in Q4 the economy will likely expand at a rate similar to that of Q3. Industrial production expanded in October, but the Markit/CIPS composite PMI was stable in November. The Committee added that spending around the Black Friday period was stronger this year compared to last year.
Regarding price developments, the MPC commented that inflationary pressures are expected to increase in the months ahead as the base effect of the drop in energy and food prices will fade. Moreover, domestic cost pressures are expected to increase on the back of a pickup in productivity. Nevertheless, the Bank expects inflation to remain below 1.0% until the second half of 2016. In this context, the MPC added that it intends, “to set monetary policy to ensure that growth would be sufficient to absorb remaining spare capacity in a manner that returned inflation to the target in around two years and kept it there in the absence of further shocks.”
The eight members who voted in favor of keeping the Bank Rate unchanged considered that the medium-term inflation outlook justified their stance. However, for the other member, the economic circumstances and the fact that monetary policy could be expected to operate with a lag continued to justify an immediate increase in the Bank Rate.
Author: Dirina Mançellari, Senior Economist