The Bank of England’s monetary policy committee (MPC) has voted unanimously to maintain the Bank Rate at 0.5%, and hold the stock of corporate bond purchases and government bond purchases at £10 billion and £435 billion respectively.
At its latest meeting on 13 December 2017, the MPC decided to maintain interest rates at their current level. This follows last month’s choice to raise rates by 0.25 percentage points, which was the first increase in nearly 10 years.
Recent figures show that inflation hit 3.1% in November. The November Inflation Report predicted modest growth in GDP over the three-year forecast period, at a pace just above its reduced rate of potential.
Nancy Curtin, chief investment officer at Close Brothers Asset Management, said: “It’s clear that now is not the time for a further rate rise.
“Even last month’s decision may have been too hasty given the strain the economy is under, and we certainly don’t expect further moves from the MPC in the short-term.”
The report predicts that consumption growth will start slow before rising in line with household incomes. Business investment will be affected by uncertainties around Brexit, but is still expected to grow at a modest pace.
Unemployment is expected to remain low, and domestic inflationary pressures to rise gradually as remaining spare capacity is absorbed and wage growth recovered. Reflecting the diminishing effect of sterling’s depreciation, CPI inflation is likely to decline from around 3% to approach the 2% target by the end of the three years.
Curtin added: “Employment may still be near a record high, but wage growth continues to lag inflation, which will limit consumer spending. Productivity tops the list of concerns for the Treasury and MPC alike.”
Inflation has been pushed above the target by the boost to import prices because of the past depreciation of sterling. The Governor will write an open letter to the Chancellor of the Exchequer accounting for the overshoot relative to the target and explaining the MPC’s policy strategy to return inflation to the target sustainably. This letter will be published with the February 2018 MPC meeting minutes and the Inflation Report.
In the exceptional circumstances that Brexit has brought about, the MPC’s remit specifies that the Committee must balance trade-off between the speed it plans to return inflation sustainably to the target and the support the monetary policy provides to jobs and activity.
The MPC believes that if the economy follows the path predicted in the November Report, modest increases in the Bank Rate would be warranted in the coming years. The Committee will closely monitor the evolving economic scene, including the impact of November’s Bank Rate increase, and be ready to respond to developments as they unfold to ensure a sustainable return of inflation to the target.
“The chancellor’s promise to bridge the productivity gap will go some way to improving supply side issues, but it will not bring the scale of improvement we need,” Curtin concluded.
“The amount of capital committed to reforming this economic driver is a drop in the ocean compared to the amount committed to issues like the UK’s divorce bill from the EU. The government clearly has little fiscal room to manoeuvre.”