Bank leaves interest rates alone........again!.....
The Bank of England's Monetary Policy Committee has voted
unanimously to maintain Bank Rate at 0.25% but is prepared to
"respond, in either direction", to changes to the economic outlook
to ensure a sustainable return of inflation to the 2% target.
In the minutes of its latest meeting, the Committee says that if
spending growth slows more abruptly than expected, there is scope
for monetary policy to be loosened. "If, on the other hand, pay
growth picks up by more than anticipated, monetary policy may need
to be tightened", the MPC said.
It has increased its expectation for growth in 2017 to 2.0% and
now expects growth of 1.6% in 2018 and 1.7% in 2019.
More : BoE holds bank rate but predicts 2% inflation in six
The Committee said the upgraded outlook reflects the fiscal
stimulus announced in the Autumn Statement, firmer momentum in
global activity, higher global equity prices and more supportive
credit conditions, particularly for households.
Domestic demand has been stronger than expected over the past
few months, and there have been "relatively few signs" of the
slowdown in consumer spending that the Committee had anticipated
following the referendum.
However it believes continued moderation in pay growth and higher
import prices following sterling’s depreciation are likely to
mean materially weaker household real income growth and lower
The projected path of inflation is therefore similar to the one
expected in November, despite the stronger growth outlook.
The value of sterling remains 18% below its peak in November
2015, and a continuation of weaker sterling is is expected to boost
consumer prices and cause inflation to overshoot the 2% target.
The Committee says this effect is already becoming evident in
the data - CPI inflation rose to 1.6% in December and the MPC says
"further substantial increases are very likely over the coming
Ben Brettell, Senior Economist at Hargreaves Lansdown,
commented: "Unsurprisingly interest rates were left on hold, but
the minutes noted that some MPC members were getting a little
closer to the limits of their tolerance for higher inflation. This
could mean we see the first interest rate rise in more than a
decade at some point this year, particularly if wage growth turns
out stronger than expected.
However I still feel this is improbable. The most likely
scenario is that higher inflation and weaker pay growth will
squeeze household budgets, meaning consumer spending is likely to
slow in real terms. The Bank is unlikely to take the risk of
raising borrowing costs in this environment. If it does happen, I
would expect rates to remain at their previous low of 0.5% for some
significant time afterwards.