| Consensus | Actual | Previous | |
|---|---|---|---|
| Bank Rate - Change | -25bp | -25bp | 0bp |
| Bank Rate - Level | 5.00% | 5.00% | 5.25% |
Highlights
In line with a decidedly shaky market consensus, the BoE MPC today announced a 25 basis point cut in Bank Rate to 5.0 percent, its first reduction since March 2020 and matching its lowest level since May last year. However, at 5-4, it was the tightest of votes as fully four members (Catherine Mann, Megan Greene, Jonathan Haskel and Huw Pill) all again opted for no change.
The ease reflects increased confidence on the part of the majority that inflation is now headed in the right direction on a sustainable basis. That said, even for those calling for a cut, the decision will not have been taken lightly. Although CPI inflation was on target at 2.0 percent in both May and June, at 3.5 percent the core rate was still worryingly high while, at 5.7 percent, the rate in services was nearly three times the target.
Crucially though, most MPC members expect the fall in headline inflation and the normalisation in inflation expectations to feed through to weaker pay and price-setting dynamics. In addition, spare capacity should emerge as GDP falls below potential and the labour market eases further. Consequently, domestic inflationary persistence is expected to fade away over the next few years, aided by what is still a restrictive stance of monetary policy.
Even so, the minutes show that there are still general concerns that the inflationary pressures from second-round effects will prove more enduring. In particular, those voting to keep Bank Rate at 5.25 percent remain worried about the ongoing elevated level of wage growth. Some also think that there is a greater risk of more enduring structural shifts, such as a rise in the medium-term equilibrium rate of employment, a fall in potential growth and a rise in the long-run neutral interest rate.
In terms of non-standard measures, the QT programme was left unamended as expected 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. At the end of July, the overall stock stood at £690 billion, all of which were gilts. QT will continue despite the reduction in borrowing costs.
Prior to today's announcement financial markets had already fully priced in two 25 basis point cuts by year-end and speculation now will focus on the next policy announcement on 19 September. By then, the MPC will have available the next two CPI and labour market reports. Given the closeness of today's vote, all these updates will probably need to show clearly diminishing underlying inflation pressures for Bank Rate to be lowered again.
The ease reflects increased confidence on the part of the majority that inflation is now headed in the right direction on a sustainable basis. That said, even for those calling for a cut, the decision will not have been taken lightly. Although CPI inflation was on target at 2.0 percent in both May and June, at 3.5 percent the core rate was still worryingly high while, at 5.7 percent, the rate in services was nearly three times the target.
Crucially though, most MPC members expect the fall in headline inflation and the normalisation in inflation expectations to feed through to weaker pay and price-setting dynamics. In addition, spare capacity should emerge as GDP falls below potential and the labour market eases further. Consequently, domestic inflationary persistence is expected to fade away over the next few years, aided by what is still a restrictive stance of monetary policy.
Even so, the minutes show that there are still general concerns that the inflationary pressures from second-round effects will prove more enduring. In particular, those voting to keep Bank Rate at 5.25 percent remain worried about the ongoing elevated level of wage growth. Some also think that there is a greater risk of more enduring structural shifts, such as a rise in the medium-term equilibrium rate of employment, a fall in potential growth and a rise in the long-run neutral interest rate.
In terms of non-standard measures, the QT programme was left unamended as expected 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. At the end of July, the overall stock stood at £690 billion, all of which were gilts. QT will continue despite the reduction in borrowing costs.
Prior to today's announcement financial markets had already fully priced in two 25 basis point cuts by year-end and speculation now will focus on the next policy announcement on 19 September. By then, the MPC will have available the next two CPI and labour market reports. Given the closeness of today's vote, all these updates will probably need to show clearly diminishing underlying inflation pressures for Bank Rate to be lowered again.
Market Consensus Before Announcement
Services inflation might still be sticky but on balance forecasters see the Bank of England cutting Bank Rate by 25 basis points to 5.00 percent.
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.
