In its statement, the central bank for the United Kingdom said all nine MPC members had agreed to maintain the stock of assets purchased by the issuance of bank reserves at 375 billion pounds and to reinvest 16.9 billion of cash from the redemption of September 2015 U.K. Treasury bonds.
As in recent months, the BOE repeated its oft-stated view that when the bank rate starts to rise, "it is expected to do so more gradually and to a lower level than in recent cycles," but qualified this by adding this guidance was "an expectation, not a promise."
"The actual path Bank Rate will follow over the next few years will depend on the economic circumstances," said the BOE in its first major statement following an MPC meeting, adding that inflation is expected to return to its target within two years and then move "slightly above" the target in the third year of its current forecast period as growth leads to excess demand.
In the past, the BOE has typically only published a brief statement with the outcome of its meetings and then followed by minutes of that meeting two weeks later. But starting today, the BOE will publish the outcome of its MPC meetings along with the minutes, giving investors more insight into its thinking and avoiding speculation about the reasons for the MPC's decisions.
In addition, the BOE today also published its quarterly inflation report, noting that risks to global growth were seen as "skewed moderately to the downside" while domestic demand in the UK was "robust and expected to remain so with wage growth beginning to pick up and investment rising.
"The likely timing of the first Bank rate increase is drawing closer," BOE Governor Mark Carney said in his statement to a press conference," adding that "the exact timing of the first move cannot be predicted in advance; it will be the product of economic developments and prospects. In short, it will be data dependent."
At the meeting concluded on Aug. 5, MPC member Ian McCafferty voted to raise the rate by 25 points, the first time since January he has voted with the majority to maintain rates. From August through December last year McCafferty and Martin Weale voted to raise the rate, arguing it should be raised before wages start to rise.
McCafferty returned to that view this month, arguing that "demand growth and wage pressures were likely to be greater, and the margin of spare capacity smaller, than embodied in the Committee's collective August projections."
In its policy statement, the BOE pointed to the impact of a 20 percent rise in the pound's exchange rate since its through in March 2013 and by 3.5 percent since May, keeping down import prices and thus pushing down inflation. In addition, the fall in energy prices in the past few months will continue to hold down inflation at least until the middle of 2016.
Set against what the BOE described as a "muted" outlook for near-term inflation, the degree of slack in the economy has "diminished substantially over the past two and a half years" as unemployment has fallen by more than 2 percentage points since mid-2013.
The BOE judged that the margin of spare capacity was around 0.5 percent of economic output and a "further modest tightening of the labour market is expected, supporting a continued firming in the growth of wages and unit labour costs over the next three years, counterbalancing the drag on inflation from sterling."
Headline inflation in the UK was zero in June, down from 0.1 percent in May but up from minus 0.1 percent in April, well-below the BOE's 2.0 percent target. The BOE estimates that around 1.5 percentage points of the deviation in inflation from its target is due to low "unusually" low prices of energy, food and other imports, while 0.5 points "reflects the past weakness of domestic cost growth, and unit labour costs in particular."
The Bank of England published the following statement:
"The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy in order to meet the 2% inflation target and in a way that helps to sustain growth and employment. At its meeting ending on 5 August 2015, the MPC voted by a majority of 8-1 to maintain Bank Rate at 0.5%. The Committee voted unanimously to maintain the stock of purchased assets financed by the issuance of central bank reserves at £375 billion, and so to reinvest the £16.9 billion of cash flows associated with the redemption of the September 2015 gilt held in the Asset Purchase Facility.
CPI inflation fell back to zero in June. As set out in the Governor’s open letter to the Chancellor, around three quarters of the deviation of inflation from the 2% target, or 1½ percentage points, reflects unusually low contributions from energy, food, and other imported goods prices. The remaining quarter of the deviation of inflation from target, or ½ a percentage point, reflects the past weakness of domestic cost growth, and unit labour costs in particular. The combined weakness in domestic costs and imported goods prices is evident in subdued core inflation, which on most measures is currently around 1%.
With some underutilised resources remaining in the economy and with inflation below the target, the Committee intends to set monetary policy in order to ensure that growth is sufficient to absorb the remaining economic slack so as to return inflation to the target within two years. Conditional upon Bank Rate following the gently rising path implied by market yields, the Committee judges that this is likely to be achieved.
In its latest economic projections, the Committee projects UK-weighted world demand to expand at a moderate pace. Growth in advanced economies is expected to be a touch faster, and growth in emerging economies a little slower, than in the past few years. The support to UK exports from steady global demand growth is expected to be counterbalanced, however, by the effect of the past appreciation of sterling. Risks to global growth are judged to be skewed moderately to the downside reflecting, for example, risks to activity in the euro area and China.
Private domestic demand growth in the United Kingdom is expected to remain robust. Household spending has been supported by the boost to real incomes from lower food and energy prices. Wage growth has picked up as the labour market has tightened and productivity has strengthened. Business and consumer confidence remain high, while credit conditions have continued to improve, with historically low mortgage rates providing support to activity in the housing market. Business investment has made a substantial contribution to growth in recent years. Firms have invested to expand capacity, supported by accommodative financial conditions. Despite weakening slightly, surveys suggest continued robust investment growth ahead. This will support the continuing increase of underlying productivity growth towards past average rates.
Robust private domestic demand is expected to produce sufficient momentum to eliminate the margin of spare capacity over the next year or so, despite the continuing fiscal consolidation and modest global growth. This is judged likely to generate the rise in domestic costs expected to be necessary to return inflation to the target in the medium term.
The near-term outlook for inflation is muted. The falls in energy prices of the past few months will continue to bear down on inflation at least until the middle of next year. Nonetheless, a range of measures suggest that medium-term inflation expectations remain well anchored. There is little evidence in wage settlements or spending patterns of any deflationary mindset among businesses and households.
Sterling has appreciated by 3½% since May and 20% since its trough in March 2013. The drag on import prices from this appreciation will continue to push down on inflation for some time to come, posing a downside risk to its path in the near term. Set against that, the degree of slack in the economy has diminished substantially over the past two and a half years. The unemployment rate has fallen by more than 2 percentage points since the middle of 2013, and the ratio of job vacancies to unemployment has returned from well below to around its pre-crisis average. The margin of spare capacity is currently judged to be around ½% of GDP, with a range of views among MPC members around that central estimate. A further modest tightening of the labour market is expected, supporting a continued firming in the growth of wages and unit labour costs over the next three years, counterbalancing the drag on inflation from sterling.
Were Bank Rate to follow the gently rising path implied by market yields, the Committee judges that demand growth would be sufficient to return inflation to the target within two years. In its projections, inflation then moves slightly above the target in the third year of the forecast period as sustained growth leads to a degree of excess demand.
Underlying those projections are significant judgements in a number of areas, as described in the August Inflation Report. In any one of these areas, developments might easily turn out differently than assumed with implications for the outlook for growth and inflation, and therefore for the appropriate stance of monetary policy. Reflecting that, there is a spread of views among MPC members about the balance of risks to inflation relative to the best collective judgement presented in the August Report. At the Committee’s meeting ending on 5 August, the majority of MPC members judged it appropriate to leave the stance of monetary policy unchanged at present. Ian McCafferty preferred to increase Bank Rate by 25 basis points, given his view that demand growth and wage pressures were likely to be greater, and the margin of spare capacity smaller, than embodied in the Committee’s collective August projections.
All members agree that, given the likely persistence of the headwinds weighing on the economy, when Bank Rate does begin to rise, it is expected to do so more gradually and to a lower level than in recent cycles. This guidance is an expectation, not a promise. The actual path Bank Rate will follow over the next few years will depend on the economic circumstances. The Committee will continue to monitor closely the incoming data."
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