Monetary policy summary
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 13 April 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 increased to 0.5% in March but remains well below the 2% inflation target. This shortfall is due predominantly to unusually large drags from energy and food prices, which are expected to fade over the next year. Despite picking up, 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 potentially lessening drag from external factors against expected gradual 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 excessive 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 2016 Inflation Report. Taking together all of the recent economic developments, the broad outlook for activity and inflation appears little changed.
There has been mixed news on near-term prospects for global growth. Immediate downside risks around Chinese activity have lessened; in the United States, indicators of GDP growth in the first quarter of the year have been disappointing, but those for the second quarter are more encouraging. Movements in the prices of risky assets suggest that investors have regained their risk appetite, possibly reflecting more positive global economic data and policy action by central banks. Nevertheless, given weak supply growth, the Committee continues to expect global growth to be somewhat subdued by historical standards.
Sterling has depreciated further over the past month. Risk-free interest rates in the United Kingdom and elsewhere have also declined. Together with rises in the prices of many risky assets, these movements should support economic activity. That said, the likelihood that much of the fall in sterling reflects uncertainty surrounding the forthcoming referendum on the United Kingdom’s membership of the European Union raises questions regarding whether the lower level of sterling will persist and its net economic impact.
Domestically, growth has been steady, and the MPC continues to expect CPI inflation to rise over the next year. The pickup in the price of oil and sterling’s recent depreciation will support that rise. There are some signs that uncertainty relating to the EU referendum has begun to weigh on certain areas of activity, as some decisions, including on capital expenditure and commercial property transactions, are being postponed pending the outcome of the vote. This might lead to some softening in growth during the first half of 2016.
At its meeting on 13 April, 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. However, referendum effects are likely to make macroeconomic and financial market indicators harder to interpret over the next few months, and the Committee is likely to react more cautiously to data news over this period than would normally be the case.
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.