All stand united at the Bank of England delivering a dovish rate hike

 

• The Bank of England policymakers voted unanimously 9-0 to raise bank rate to 0.75% compared with the expectations of a 7-2 voting pattern.
• The Bank of England estimates long-term trend for real interest rate in the UK economy around zero to 1.0%, equivalent to bank rate of 2-3%; shorter-term equilibrium interest rate is lower.
• While the Bank of England remained fairly upbeat on the economic growth, its outlook for further policy moves remained conservative.
• Everyone should remember Bank’s message of rate increases being “gradual and limited” confirming dovish monetary policy stance.

The Monetary Policy Committee members of the Bank of England stood all united while voting unanimously in favor of the Bank rate increase by 25 basis point to 0.75% in August. The rate hike is justified by tight UK labor market and inflation above 2% throughout the next two years.

“The contribution of external pressures is projected to ease over the forecast period while the contribution of domestic cost pressures is expected to rise. Taking these influences together, and conditioned on the gently rising path of Bank Rate implied by current market yields, CPI inflation remains slightly above 2% through most of the forecast period, reaching the target in the third year,” the Bank of England wrote in the Monetary Policy Summary.

While the Bank of England remained fairly upbeat on the economic growth, its outlook for further policy moves remained conservative.

The Bank of England estimates overall slack in the UK economy at zero in the third quarter of this year expecting excess demand of 0.25% of potential GDP in two years' time. While external shocks including the recent wave of protectionism are seen slowing the global economy, domestic economic features are set to remain steadily solid. 

The UK unemployment rate is estimated to stand at 3.9% in two years' time compared to 4.0% projection from the May Inflation Report. So it is the robustness of the UK labor market that would keep the inflation rate above 2% target for the next three year should the Bank rate remain at 0.75%.  

The Bank of England Governor Mark Carney said that the bigger picture is of external cost pressures easing with p[ost Brexit Sterling’s depreciation push on UK inflation easing while domestic inflation pressures are building with the labor market slack being absorbed.

Carney also said that given how low UK productivity is, with the UK wage growth in the range from the upper 2%  to low 3%rasing the Bank rate gradually and into the limited extent is consistent with the inflation target.

"Monetary policy needs to walk, not run, to stand still as equilibrium interest rate rises gradually," Carney said in the press conference stressing out that everyone, whether borrower or saver, should remember the Bank of England’s limited and gradual message on the pace of rate increases.

A decade of UK inflation and the Bank rate