GB: BOE Announcement & Minutes

Thu Mar 22 07:00:00 CDT 2018

Consensus Actual Previous
change 0bp 0bp 0bp
Level 0.5% 0.5% 0.50%
Asset Purch Level Chg Stg0B Stg0B Stg0B
Asset Purch Level Stg435B Stg435B Stg435B

As widely expected, the BoE's March MPC meeting concluded with another vote for no change. Bank Rate stays at 0.50 percent and the QE ceiling at Stg445 billion (gilts Stg435 billion, corporate bonds Stg10 billion). However, the decision on interest rates was not unanimous as the Committee's two main hawks (Ian McCafferty and Michael Saunders) wanted an immediate 25 basis point tightening.

Forward guidance was also unrevised with the MPC still expecting any future increases in Bank Rate 'to be at a gradual pace and to a limited extent'. The minutes show that most MPC members took the view that recent economic data had contained few surprises so there was no need for any immediate action. Still financial markets will focus on the split vote which will be seen as increasing the likelihood of higher official borrowing costs at the next meeting on May 8th. That said, note that both McCafferty and Saunders have dissented in favour of tightening in the past and, in the light of the acceleration in wages growth shown in Wednesday's labour market report (see calendar entry) today's call should come as no great surprise.

In any event, irrespective of the March MPC outcome, the underlying message in the minutes is that interest rates are going up and it is just a matter of time before that happens. The bottom line is that demand is still expected to expand at a rate above the UK's productive potential making a tightening of the monetary stance a necessary step if inflation is to be brought back to target (2 percent) on a sustainable basis.

The May gathering will have the benefit of a new Quarterly Inflation Report (QIR) which in itself, significantly boosts the chances of a move then. The next QIR after that is not scheduled until August which, for most MPC members, is probably a little too late.

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.