GB: BOE Announcement & Minutes

Thu Sep 14 06:00:00 CDT 2017

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

As generally expected, September's BoE MPC meeting made no changes to monetary policy. Bank Rate was held at 0.25 percent while QE purchases of gilts and corporate bonds remain at Stg435 billion and Stg10 billion respectively.

However, it was another split decision (7-2) with the two main hawks, Ian McCafferty and Michael Saunders, renewing their call for an immediate 25 basis point tightening.

In fact, the minutes suggest that a tightening may not be too far away with most members apparently leaning towards a rate hike in coming months if the economy evolves as expected. Indeed, the accompanying statement again warned that policy may have to be tightened by more than financial markets currently discount and also hinted that the first rate hike could be delivered quite soon. This will inevitably boost speculation about the next MPC meeting in November when a new Quarterly Inflation Report will be available. However, any increase is still expected to be only small and the eventual tightening process will be gradual.

Today's decision reflects the MPC's ongoing dichotomy over persistently above target inflation on the one hand and weak domestic price pressures on the other. To this end, the performance of the wages market will be a key factor in coming months. As Wednesday's labour market report made plain (see calendar entry), current earnings growth is both subdued and even negative in inflation-adjusted terms. However, should wages accelerate - and the newly announced removal of the 1 percent public sector pay cap will help here a gentle monetary tightening would probably prove irresistible.

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.