GB: BOE Announcement


Thu Jan 08 06:00:00 CST 2015

Consensus Actual Previous
change 0bp 0bp 0bp
Level 0.5% 0.5% 0.5%
Asset Purch Level Chg Stg0B Stg0B Stg0B
Asset Purch Level Stg375B Stg375B Stg375B

Highlights
As widely anticipated the BoE MPC began 2015 with the same policy stance as it ended 2014: Bank Rate at 0.5 percent and QE at Stg375 billion.

Recent UK economic news has been mixed and offered something for the MPC's doves and hawks alike. Thus, while most areas of the economy seem to have lost at least some momentum and inflation has slowed to just 1.0 percent, the labour market has continued to tighten and wages have begun to accelerate, albeit from historically very low levels.

However, for the time being at least oil market developments look set to ensure that the doves continue to rule the policy roost. In its November Quarterly Inflation Report (QIR) the Bank's base case forecast put annual CPI inflation at 1.02 percent this quarter before a rise to 1.43 percent by year-end. In practice the collapse in oil prices makes a clear sub-1 percent rate seem all but assured in the current period. The BoE will stress the importance of looking through such (presumably) temporary distortions but with deflation a growing global risk any calls for a higher Bank Rate should land on largely deaf ears for some time.

Should the economy expand at a fast enough pace to generate a genuinely inflationary boost to wages then the MPC might feel obliged to act. However, at this stage this looks very unlikely, all the more so with household inflation expectations being gradually ratcheted down.

Definition
The Bank of England announces its monetary policy with regard to interest rates monthly . At the same meeting it will also report on any moves it might have decided upon in respect of unconventional policy instruments although these can be adjusted at any time.

Description
Bank of England determines interest rate policy at their Monetary Policy Committee meetings. These meetings occur monthly during the first week of the month and are an influential event for the markets. Prior to each meeting, market participants speculate about the possibility of an interest rate change. Depending upon recent economic developments, the MPC may or may not issue a post-meeting statement. If the outcome is different from expectations, the impact on the markets can be dramatic and far-reaching. The minutes of the meetings, including a record of the vote, are published on the Wednesday of the second week after the meeting takes place. Each quarter, the Bank publishes its Inflation Report, which provides a detailed analysis of economic conditions and the prospects for economic growth and inflation agreed by the MPC.

The Bank's monetary policy objective is to deliver price stability - low inflation - and, subject to that, to support the Government's economic objectives including those for growth and employment. A new remit announced by the Chancellor in March 2013 has hinted that the real economy may have a larger say in policy decisions going forward. Price stability is defined by the Government's medium-term inflation target of 2 percent, as measured by the annual change in the consumer price index. The foundation of the Bank's policy is the recognition of role of price stability in achieving economic stability more generally, and in providing the right conditions for sustainable growth in output and employment. The Government's inflation target is announced each year by the Chancellor of the Exchequer in the annual Budget statement.

As in the United States, market participants speculate about the possibility of an interest rate change at these meetings. If the outcome is different from expectations, the impact on British markets - and to some extent those in Europe - can be dramatic and far-reaching. The interest rate set by the Bank of England, serves as a benchmark for all other rates. A change in the rate translates directly through to all other interest rates from gilts (fixed interest government securities named after the paper on which they were once printed) to mortgage loans.

The Bank of England sets an interest rate (Bank Rate) at which it lends to financial institutions. This interest rate then affects the whole range of interest rates set by commercial banks, building societies and other institutions for their own savers and borrowers. It also tends to affect the price of financial assets, such as bonds and shares, and the exchange rate, which affect consumer and business demand in a variety of ways. Lowering or raising interest rates affects spending in the economy.

The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.