GB: BOE Announcement & Minutes

Thu Sep 15 06:00:00 CDT 2016

Consensus Actual Previous
change 0bp 0bp -25bp
Level 0.25% 0.25% 0.25%
Asset Purch Level Chg Stg0B Stg0B Stg60B
Asset Purch Level Stg435B Stg435B Stg435B

Having reduced Bank Rate and boosted its QE programme just last month, the chances of any additional monetary stimulus today were always slim and the September MPC meeting duly returned an unchanged policy stance. The benchmark interest rate stays at 0.25 percent and the asset purchase scheme for government bonds is held at Stg435 billion. The target for corporate bond buying similarly remains at (up to) Stg10 billion. The vote was unanimous although both Ian McCafferty and Kristin Forbes again expressed some reservations about August's increase in QE.

Since the August MPC discussions the economy has shown some signs of cooling but growth seems to be holding up reasonably well and certainly much better than the more pessimistic post-Brexit vote forecasts. Even inflation (annual 0.6 percent rate in August) has not responded as much to the pound's slide as many, including the Bank, anticipated. So there was little pressure for any additional measures today.

Indeed, the minutes show the MPC acknowledging that economic activity has not slowed as quickly as envisioned in the August Quarterly Inflation Report (QIR) and has revised up its growth expectations for the second half of the year. In part this reflects the effects of the monetary stimulus delivered at last month's meeting.

That said, BoE Governor Carney still sounded quite dovish in testimony last week and the signs are that Bank Rate could yet be cut again should there be a marked deterioration in the upcoming economic data. To this end, the minutes suggest that the Bank sees the effective lower bound to rates at close to, but slightly above zero implying that any further reductions would be only minimal.

Note that today's meeting was the first to be attended by Michael Saunders who has replaced Martin Weale, previously recognised as one of the MPC's principal hawks. In addition, the next policy gathering will not be until November as the Bank switches to its new schedule of eight, rather than twelve, MPC meetings each year.

The Monetary Policy Committee (MPC) of the Bank of England (BoE) 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 and any unconventional policy instruments every month but this will change when the meeting schedule is reduced to eight a year later in 2016. 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.

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.