GB: BOE Announcement & Minutes

Thu Nov 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

The BoE MPC announced no changes to either Bank Rate (0.5 percent) or QE (Stg375 billion) at its November policy meeting. The outcome was widely expected and most attention was always going to be on the voting pattern and what the new Quarterly Inflation Report (QIR) had to say.

The minutes of the meeting showed that this month's decision again masked a lone call from Ian McCafferty for an immediate 25 basis point hike in Bank Rate. His familiar rationale was that the output gap has closed and the medium-term risks to inflation were on the upside. However, the majority remained cautiously content with the existing stance.

That said, on the basis of market expectations for interest rates (Bank Rate 0.6 percent in the third quarter of 2016, 0.7 percent in the first quarter of 2017 and 1.3 percent by the end of 2018) inflation is seen at 2.06 percent in two years' time and 2.22 percent at the end of 2018. This is slightly above the August projections for 2.06 percent and 2.14 percent respectively and means that inflation is officially seen above its 2 percent medium-term target throughout 2018.

All of which suggests that the risks of a tightening are rising, but only very gradually. The pound is unlikely to find any real support here. With inflation still so low a near-term hike still looks very unlikely and indeed, the near-term CPI forecast has been revised yet lower. Nonetheless, financial markets may now be that much more sensitive to stronger than expected data.

Also of note, the minutes indicated that the stock of QE will be maintained at Stg375 billion until Bank Rate has risen to around 2.0 percent. To this end, maturing gilts will continue to be reinvested.

The Bank of England's Monetary Policy Committee (MPC) comprises nine experts, five of which are senior central bank executives and the other four are external members appointed by the Chancellor of the Exchequer. The MPC currently announces its monetary policy with regard to interest rates every month. 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 according to economic developments. With a view to enhancing policy transparency, as of August 2015 the minutes of the MPC's deliberations, which indicate how each member voted, have been released alongside the policy announcement. Forward guidance was introduced in August 2013 but since then its framework has become increasingly qualitative and now provides only limited information about where policy might be headed. Under current proposals the number of MPC meetings will be reduced from twelve to eight from 2016.

The Bank of England determines interest rate policy at their Monetary Policy Committee meetings. These meetings currently occur during the first week of each month and are an influential event for the markets. Prior to each meeting, market participants speculate about the possibility of a change in the benchmark Bank Rate or unconventional monetary instruments. The MPC may or may not issue a post-meeting statement explaining its decisions in addition to the discussion's minutes which, since August 2015, have been released alongside the policy announcement. If the outcome is different from expectations, the impact on the markets can be dramatic and far-reaching. In the middle month of 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. This is now made available at the same time as the policy announcement and release of the minutes.

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 remit announced by the Chancellor in March 2013 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.