GB: BOE Announcement & Minutes

Thu Jun 21 06:00:00 CDT 2018

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

The June BoE MPC decision lived up to market expectations and policy will again remain on hold this month. Bank Rate stays at 0.5 percent and the overall ceiling on QE at £445 billion (gilts £435 billion, corporate bonds £10 billion). However, there was a surprise in the vote which saw the Committee's two main hawks, Ian McCafferty and Michael Saunders, joined by Chief Economist Andy Haldane in calling for an immediate 25 basis point tightening. This made for a 6:3 split.

The updated forward guidance shows the MPC retaining a tightening bias and still anticipating any future increases in Bank Rate being at a gradual pace and to a limited extent. However, the guidance was effectively tightened as the Committee also decided to reduce the Bank Rate threshold for when it will start to unwind QE. Previously the Bank had indicated that its benchmark rate would need to be close to 2 percent before it would start to shrink its balance sheet but it has now lowered the potential trigger level to around 1.5 percent. That said, any reductions in the stock of purchased assets will be conducted over a number of years and at a gradual and predictable pace.

The minutes of today's meeting show that the majority of members still want to see additional data before pulling the trigger on interest rates. Moreover, they thought that the balance of risks to the economic outlook had shifted to the downside in respect of slower global growth although they still regard weak first quarter UK GDP as temporary. The three dissenters emphasised upside risks stemming from a strong labour market and rising pay settlements.

There is no MPC meeting scheduled for July so the next (and McCafferty's last) will be on 2nd August when the new Quarterly Inflation Report will be available. This has been the focal point for financial markets ever since the Bank failed to tighten in May and will loom all the larger on investors' radars in the wake of today's vote. The pound initially rallied a little on what was a slightly more hawkish outturn than expected but remains vulnerable to any soft data that reduce tightening prospects in August. Quite apart from Brexit, upcoming economic news will be particularly important.

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.