| Consensus | Actual | Previous | |
|---|---|---|---|
| Bank Rate - Change | 0bp | 0bp | 0bp |
| Bank Rate - Level | 5.25% | 5.25% | 5.25% |
Highlights
A strong market conviction that policy would not be adjusted today proved correct as the BoE MPC announced it would be holding Bank Rate at 5.25 percent. The benchmark rate has been at this level, a 16-year high, since it was last raised by 25 basis points back in August last year.
However, the vote shows a modest shift towards possible future rate cuts as the leading dove, Swati Dhingra, was joined by Deputy Governor Dave Ramsden in calling for an immediate 25 basis point ease. With no one wanting to raise rates, the other seven members again all voted for no change.
Predictably too, the QT programme was left unamended with the MPC simply re-affirming its aim to reduce the stock of gilts held in the Asset Purchase Facility by £100 billion to £658 billion over the 12 months that began last October. In early-May, the overall stock stood at £703 billion, all of which were gilts, the Corporate Bond Purchase Scheme having been fully unwound on 2 April.
The tone of the minutes suggests that the MPC as a whole has become a little more confident that inflation is beginning to behave itself but is not yet fully convinced. The April CPI report due in a couple of weeks should show headline inflation sliding to around 2 percent but, as the new Monetary Policy Report (MPR) shows, the bank sees some upside risks over the second half of the year owing to the unwinding of energy-related base effects. Consequently, it will be wary about pulling the easing trigger too soon. That said, it also noted that developments in the Middle East have so far had only a limited impact on oil prices.
Inflation persistence is still an issue, notably in services where inflation was elevated at 6.0 percent in March. The bank remains cautious about the reliability of the ONS Labour Force Survey but judges that the labour market continues to loosen although it remains relatively tight by historical standards. Pay growth similarly is thought to be easing, albeit still high.
Today's announcement and vote are more dovish than in March but should leave financial markets expecting the first cut in Bank Rate in August or September. For now, June would still seem to be at most just a possibility as some key indicators of inflation simply remain too far above the 2 percent target.
However, the vote shows a modest shift towards possible future rate cuts as the leading dove, Swati Dhingra, was joined by Deputy Governor Dave Ramsden in calling for an immediate 25 basis point ease. With no one wanting to raise rates, the other seven members again all voted for no change.
Predictably too, the QT programme was left unamended with the MPC simply re-affirming its aim to reduce the stock of gilts held in the Asset Purchase Facility by £100 billion to £658 billion over the 12 months that began last October. In early-May, the overall stock stood at £703 billion, all of which were gilts, the Corporate Bond Purchase Scheme having been fully unwound on 2 April.
The tone of the minutes suggests that the MPC as a whole has become a little more confident that inflation is beginning to behave itself but is not yet fully convinced. The April CPI report due in a couple of weeks should show headline inflation sliding to around 2 percent but, as the new Monetary Policy Report (MPR) shows, the bank sees some upside risks over the second half of the year owing to the unwinding of energy-related base effects. Consequently, it will be wary about pulling the easing trigger too soon. That said, it also noted that developments in the Middle East have so far had only a limited impact on oil prices.
Inflation persistence is still an issue, notably in services where inflation was elevated at 6.0 percent in March. The bank remains cautious about the reliability of the ONS Labour Force Survey but judges that the labour market continues to loosen although it remains relatively tight by historical standards. Pay growth similarly is thought to be easing, albeit still high.
Today's announcement and vote are more dovish than in March but should leave financial markets expecting the first cut in Bank Rate in August or September. For now, June would still seem to be at most just a possibility as some key indicators of inflation simply remain too far above the 2 percent target.
Market Consensus Before Announcement
No MPC member wanted to hike rates in March and only one wanted to cut. A similar outcome is expected at the May meeting.
Definition
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 previously announced its monetary policy with regard to interest rates and any unconventional policy instruments every month but this was changed when the meeting schedule was truncated to eight a year 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.
Description
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.
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.
