Monetary policy summary
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The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target and in a way that helps to sustain growth and employment. At its meeting ending on 16 March 2016, the MPC voted unanimously to maintain Bank Rate at 0.5%. The Committee also voted unanimously to maintain the stock of purchased assets financed by the issuance of central bank reserves at £375 billion.
Twelve-month CPI inflation rose to 0.3% in January. Inflation nonetheless remains well below the 2% inflation target. This is due predominantly to unusually large drags from energy and food prices, which are expected to fade in the coming months. But core inflation also remains subdued, a consequence of the past appreciation of sterling, weak global inflation and restrained domestic cost growth.
Returning inflation to the 2% target requires balancing the drag from external factors against increases in domestic cost growth. Fully offsetting that drag over the short run would, in the MPC’s judgement, involve too rapid an acceleration in domestic costs, one that would risk being unsustainable and would lead to undesirable volatility in output and employment. Given these considerations, the MPC intends to set monetary policy to ensure that growth is sufficient to return inflation to the target in around two years and keep it there in the absence of further shocks.
The MPC set out its most recent detailed assessment of the economic outlook in the February Inflation Report. Over the medium term, growth in the advanced economies should continue to be supported by the boost to real incomes from low commodity prices, and to some degree by fiscal and monetary policy. But emerging market economies are likely to grow more slowly than in recent years and the risks to the MPC’s central projection of only modest global growth lie to the downside. Data releases since the February Inflation Report show little change in the near-term outlook for growth in the United Kingdom’s main trading partners.
In the United Kingdom, underlying growth of private domestic demand remains solid. A tighter labour market and rising productivity are expected to support real incomes and consumption. Consumer confidence and most surveys of business investment are above historical averages. And, in the past month, changes in asset prices have generally been supportive for UK growth and inflation. The prices of risky assets have rebounded. Relative to the conditioning assumptions that underlay the projections published in the Committee’s February Inflation Report, oil prices have risen and UK short-term interest rates and sterling have fallen. Sterling has depreciated by around 9% in effective terms from its peak in mid-November 2015.
Set against that, there appears to be increased uncertainty surrounding the forthcoming referendum on UK membership of the European Union. That uncertainty is likely to have been a significant driver of the decline in sterling. It may also delay some spending decisions and depress growth of aggregate demand in the near term. Overall, however, the Committee judges the outlook for domestic activity to be little changed from the time of the February Inflation Report, with GDP expected to grow at around average rates over the forecast period.
Wage growth has evolved broadly as expected in the February Inflation Report. The return to higher rates of inflation should in time support wage gains. The MPC judges that inflation expectations remain well anchored, though it remains watchful for signs that low inflation is having more persistent second-round effects on wages. Overall, while domestic cost growth over the past year has been below that necessary for inflation to return to the 2% target, its pace is expected to increase over time.
As in February, there is a range of views among MPC members about the balance of risks to inflation relative to the central projection presented in the February Inflation Report. At its meeting ending on 16 March, the MPC judged it appropriate to leave the stance of monetary policy unchanged. The MPC’s best collective judgement is that it is more likely than not that Bank Rate will need to increase over the forecast period to ensure inflation returns to the target in a sustainable fashion.
All members agree that, given the likely persistence of the headwinds weighing on the economy, when Bank Rate does begin to rise, it is expected to do so more gradually and to a lower level than in recent cycles. This guidance is an expectation, not a promise. The actual path Bank Rate will follow over the next few years will depend on the economic circumstances.