GB: BOE Announcement

Thu Feb 05 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

As expected the BoE announced no changes to either Bank Rate (0.5 percent) or QE (Stg375 billion) at the conclusion of its February MPC meeting.

Having seen Martin Weale and Ian McCafferty drop their joint call for an immediate 25 basis point tightening just last month the likelihood of any surprises today was always very low. As it is, a near certain unanimous vote to keep policy steady (the meeting's minutes are due on 16th February) will have reflected further signs of a gentle moderation in UK economic growth and the continued weakness of consumer prices.

Since the MPC's January deliberations there have been further indications of a pick-up in wage growth, masked in some of the inflation gauges by the slump in oil prices. However, from such a low starting point this is hardly a worry at this stage. Indeed, annual average earnings were still rising at only a 1.4 percent annual rate in the fourth quarter.

Consequently, with the pound already uncomfortably strong, the housing market, notwithstanding today's surprisingly firm data from the Halifax, well off its highs and a general election just three months away, it will take some significant shocks in the upcoming economic data to force the BoE to change tack anytime soon. The quarterly Inflation Report (QIR) will update the Bank's view of how the economy is performing in a couple of weeks' time.

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.

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.