BoE leaves Bank Rate at 0.1%, as expected

The Bank of England (BoE) announced its Monetary Policy Committee (MPC) voted 9-0 to keep the Bank Rate at 0.1 percent at its August meeting, as widely expected.

The MPC also voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases at GBP20 billion and voted by a majority of 7-1 to continue with the existing programme of UK government bond purchases at GBP875 billion, thus maintaining the total target stock of asset purchases at GBP895 billion.

In its policy report, the BoE notes:

• UK GDP is expected to have risen by 5% in Q2, leaving it around 4% below its pre-pandemic level and slightly stronger than expected in May;
• GDP is seen to grow by around 3% in Q3, somewhat weaker than expected in May due to small negative impact from recent developments in the pandemic;
• UK GDP is projected to recover further over the remainder of the year, reaching its pre-pandemic level in Q4;
• Further out, pace of GDP growth is expected to slow towards more normal rates, partly reflecting gradual tightening in stance of announced fiscal policy;
• Frictions in UK’s labour market are judged likely to dissipate over forecast period, boosting growth in effective supply capacity. There is uncertainty around these judgements, including how economy will adjust to the end of furlough scheme;
• CPI inflation is projected to rise temporarily in near term, to 4% in Q4, owing largely to developments in energy and other goods prices, before falling back to close to the 2% target;
• MPC’s central expectation is that current elevated global and domestic cost pressures will prove transitory. Nonetheless, economy is projected to experience more pronounced period of above-target inflation in near term than expected in May;
• MPC has had policy guidance in place specifying that it does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving 2%-inflation target sustainably. Some members judge that, although considerable progress has been made in achieving the conditions of that guidance, conditions are not yet met fully. Other members judge that conditions of the guidance have been met fully, but note that guidance made clear that these have only ever been necessary not sufficient conditions for any future tightening in monetary policy;
• All members confirm that in judging appropriate stance of monetary policy, MPC will, as always, focus on medium-term prospects for inflation rather than factors that are likely to be transient;
• MPC will be monitoring closely incoming evidence regarding developments in labour market, and particularly unemployment, wider measures of slack and underlying wage pressures;
• MPC judges that, should economy evolve broadly in line with central projections in the August Monetary Policy Report, some modest tightening of monetary policy over forecast period is likely to be necessary to be consistent with meeting inflation target sustainably in medium term;
• There is uncertainty about impact of reducing stock of purchased assets on monetary conditions, but MPC judges that, when conducted in a gradual and predictable manner and when markets are functioning normally, it is likely to be smaller than that of asset purchases;
• MPC intends to begin to reduce stock of purchased assets when Bank Rate has reached 0.5%, if appropriate given economic circumstances
• MPC judges that the reduction in stock of purchased assets should initially occur through ceasing reinvestment of maturing assets, to allow reduction to occur at gradual and predictable pace