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UK CommentNo change to policy from the BoE, but 7-2 vote could indicate next rate increase is close

  1. No change to policy; vote to keep bank rate unchanged was 7-2
  2. Outlook broadly unchanged
  3. We reiterate our expectation of a rate increase in May
No change to policy; vote to keep bank rate unchanged was 7-2
As expected, the Monetary Policy Committee (MPC) of the Bank of England (BoE) decided to keep the policy rate unchanged at 0.5 percent today. The decision was 7-2. The minority wanted to increase the policy rate at today’s meeting. The MPC voted unanimously to maintain the stock of corporate bond purchases and UK government bond purchases. The language describing the outlook and the monetary policy assessment was left broadly unchanged.
Outlook broadly unchanged
According to the BoE, the prospects for global GDP growth remain strong and financial conditions continue to be accommodative, with little persistent effects from the recent financial market volatility. According to the BoE, the latest activity indicators suggest that the underlying pace of GDP growth in the first quarter of 2018 remained similar to that in the final quarter of 2017. Overall, the bank staff’s usual models suggested that underlying GDP would grow by around 0.4 percent in Q1 2018, in line with the estimate in the February Inflation Report. However, after incorporating an initial judgement on the impact of the weather-related distortions, the BoE’s estimate of headline GDP growth was revised down to 0.3 percent for Q1 2018. CPI inflation fell from 3.0 percent in January to 2.7 percent in February, which was 0.2 percentage points below the estimate of the BoE. However, that news had partly reflected changes to the CPI component weights by the ONS, which had weighed on inflation. The BoE still expected inflation to ease further in the short term but to remain above the target. The BoE said that pay growth continued to pick up, in line with expectations at the time of the February Report, and that the firming of shorter-term measures of wage growth in recent quarters and a range of survey indicators suggested pay growth would rise further in response to the tightening labour market. This had provided the MPC members with increasing confidence that growth in wages and unit labour costs would pick up to target-consistent rates.
We reiterate our expectation of a rate increase in May
The MPC repeated the message from February that the steady absorption of slack had reduced the degree to which it was appropriate for the BoE to accommodate an extended period of inflation above the target. The MPC noted that there had been few surprises in recent economic data; for the majority of members, that meant the bank rate should be left unchanged at this meeting. Two members favoured an immediate increase in the bank rate at today’s meeting. These members noted the widespread evidence that slack was largely used up and that pay growth was accelerating, thereby presenting upside risks to inflation in the medium term. A modest tightening of monetary policy at this meeting could mitigate the risks from a more sustained period of above-target inflation, in their view. The MPC noted that the May forecast round would enable the Committee to undertake a fuller assessment of the underlying momentum in the economy and the extent of domestic inflationary pressures. The message from the BoE today was much the same as in February, but two of the members voted for a rate increase at today’s meeting. Thus, we have become even more confident in our expectation of a 25 basis point increase to the rate in May. The likelihood of a rate increase in May, as indicated by market pricing, increased to 81 percent after today’s message from the BoE compared to 64 percent yesterday.


Kari Due-Andresen

Chief Economist Norway

Norway and UK

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