The Monthly Interest

May 2017
Emma McHugh

The Bank of England has announced their decision to keep interest rates at 0.25% following Thursday’s meeting of the Monetary Policy Committee (MPC).  The vote for rates to remain at 0.25% was passed by seven votes with Kristen Forbes as the lone dissenter who instead seeks a rate rise due to inflationary pressures (the MPC currently has eight members until Charlotte Hogg is replaced).  Breaking from its recent narrow trading range, we saw an immediate fall in sterling to below $1.2860 (from above $1.29) which indicates the market’s disappointment that Forbes had been unsuccessful in persuading anyone to her hawkish argument.

The Inflation Report also published today, showed a marginal cut in growth expectations for 2017 (1.9% from 2.0%).  This was focused on downward revisions to consumer spending as real household incomes are under pressure from higher inflation.  The Inflation Report shows the Bank of England expects average weekly earnings to fall to 2.25% towards the end of 2017 even though the UK is thought to be close to full employment.  Continued weak productivity, coupled with higher input costs for businesses, explains why reduced slack in the labour force isn’t leading to near-term higher wages.

Overall the Bank of England judges medium-term inflation in line with its 2% target, although inflation expectations were marginally changed.  The MPC now sees inflation peaking at 2.8% in Q4 17 and then falling to 2.2% by end 2019.  The minutes of the MPC highlight the weakness in sterling as the key input for higher inflation this year.  It is noted that the MPC will only tolerate higher inflation within limits but that it does not read as though a rate of 2.8% is outside of that limit.  There is no evidence to suggest that the Bank of England will be changing the base rate before market expectations of Q3 18.

Emma McHugh, Bank Economist.