May BoE Meeting Recap: No change to policy, wage growth flagged as risk

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Image via Bank of England

Summary:

  • BoE keeps interest rates unchanged at 0.25%, with a 7 -1 vote
  • BoE keeps asset purchases steady at £435 billion
  • Inflation expected to overshoot BoE’s inflation target well into 2018
  • 2017 inflation forecast at 2.7%; GDP growth expected at 1.7%

The Bank of England’s monetary policy meeting yesterday on 11th May saw the 8-member monetary policy committee voting 7 – 1, to leave interest rates unchanged at record lows of 0.25%. The BoE cut rates in August 2016.

Kristen Forbes, BoE policymaker once again voted for a 25 basis point rate hike. Policy makers, however, voted unanimously to keep the asset purchased steady at £435 billion.

The Bank of England said that the monetary policy remained appropriate and that continuing stability of the monetary policy would depend on a mix of factors that include inflation and slack in the economy. Inflation continues to overshoot the BoE’s inflation target of 2%.

The BoE had a slightly hawkish tilt in noting that monetary policy could be tightened should there be evidence of economic growth. In this case, the central bank said that monetary policy would be tightened by a greater extent.

Speaking at the press conference, BoE Governor, Mark Carney said that wage growth remained weak and with a contrasting increase in consumer prices, households are expected to feel the squeeze. The central bank chief, however, said that wage growth could be expected to pick up eventually.

BoE Publish Inflation Forecasts

The BoE also published fresh inflation forecasts and growth outlook figures. The central bank downgraded the 2017 growth forecasts to 1.9% from 2% previously and growth for the second quarter is estimated at 0.4%. The central bank cited weaker household spending would post a drag on consumption.

For 2018, however, growth projections were hiked from 1.6% previously to 1.7% and 1.8% for 2019.

On inflation, policymakers said that they expect inflation to continue to rise above the central bank’s target in the coming months and would peak just under 3% by the end of the fourth quarter this year.

The central bank raises the 2017 inflation forecasts to 2.7% from 2.4% previously, and for 2018, it expects inflation to rise to 2.6%, up from 2.2% that was forecast previously.

On the forecasts, the central bank said that the figures assumed that the UK’s new trade and economic relations with the EU would be smooth.

Weak economic figures from the UK

Ahead of the BoE’s meeting, economic data included the manufacturing, construction, and industrial output numbers. The downturn in the UK’s economy over the past few months very evident but yesterday’s data highlighted that British businesses might have been struggling even more.

Manufacturing production contracted more than expected and rather severely in March and the sector took a downturn as the initial boost from weaker exchange rate failed to stoke demand for UK goods.

Manufacturing production fell 0.6% during the month, more than expected, while construction output slipped 0.7% and industrial output was down 0.5%.

The UK’s trade balance for goods also showed that consumers continued to focus on imports over domestic products despite a fall in the exchange rate. This led the UK’s trade deficit to widened by £5.7 billion to £10.5 billion.

UK GDP Disappoints But GBP Pairs Rise Further

For some analysts, the growth forecasts were seen as a hawkish upgrade from the central bank, but a lot is still to unfold. Kristen Forbes who has been the lone dissenter voting for a rate hike will complete her term in June, which puts the remainder of the MOC members into the dovish vote camp.

The British pound fell to a 5-day low yesterday reaching the lows of 1.2851 before managing to pull off from the day’s lows to close at 1.2885.

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