The Committee voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion. The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.
In the MPC’s most recent economic projections, set out in the August Inflation Report, GDP was expected to grow by around 1¾% per year on average over the forecast period, conditioned on the gently rising path of Bank Rate implied by market yields at that time. Although modest by historical standards, the projected pace of GDP growth was slightly faster than the diminished rate of supply growth, which averaged around 1½% per year. With a very limited degree of slack remaining, a small margin of excess demand was therefore projected to emerge by late 2019 and build thereafter, feeding through into higher growth in domestic costs than has been seen over recent years. The contribution of external cost pressures, which has accounted for above-target inflation since the beginning of 2017, was projected to ease over the forecast period. Taking these influences together, and conditioned on the gently rising path of Bank Rate, CPI inflation remained slightly above 2% through most of the forecast period, reaching the target in the third year.
Recent news in UK macroeconomic data has been limited and the MPC’s August projections appear to be broadly on track. UK GDP grew by 0.4% in 2018 Q2 and by 0.6% in the three months to July. The UK labour market has continued to tighten, with the unemployment rate falling to 4.0% and the number of vacancies rising further. Regular pay growth has risen further to around 3% on a year earlier. CPI inflation was 2.5% in July.
The global economy still appears to be growing at above-trend rates, although recent developments are likely to have increased downside risks around global growth to some degree. In emerging market economies, indicators of growth have continued to soften and financial conditions have tightened further, in some cases markedly. Recent announcements of further protectionist measures by the United States and China, if implemented, could have a somewhat more negative impact on global growth than was anticipated at the time of the August Report.
The MPC continues to recognise that the economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of EU withdrawal. Since the Committee’s previous meeting, there have been indications, most prominently in financial markets, of greater uncertainty about future developments in the withdrawal process.
The Committee judges that, were the economy to continue to develop broadly in line with the August Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2% target at a conventional horizon. As before, these projections were conditioned on the expectation of a smooth adjustment to the average of a range of possible outcomes for the United Kingdom’s eventual trading relationship with the European Union. At this meeting, the Committee judged that the current stance of monetary policy remained appropriate. Any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent.