BoE: Monetary policy on hold for now – Lloyds Bank

Nikesh Sawjani, Research Analyst at Lloyds Bank points out that following the revelation that three external members of the BoE’s Monetary Policy Committee voted for an immediate quarter-point rise in June, the Bank of England’s Chief Economist, Andy Haldane, and Governor, Mark Carney, recently weighed in to the debate.

Key Quotes

“In a speech in Bradford, Andy Haldane noted that, provided the economy remained “on track”, it would be appropriate to take back some of the stimulus provided last August “going into the second half”. Even Governor Carney appeared to row back a little from earlier dovish comments, acknowledging that some removal of monetary stimulus “is likely to become necessary” if the economy holds up and inflation pressures continue to build.”

“While more recent comments from Deputy Governor Ben Broadbent have pushed back against market expectations of a near-term rate hike it seems clear that, if the economy sustains momentum, the Bank of England is likely to take back some of the stimulus provided last August in the aftermath of the EU referendum result. It has already sought to reverse some of this stimulus following its recent decent decision to raise bank capital buffers. On top of this, it could signal that the Term Funding Scheme may not be extended past its current end-Feb 2018 date at the next MPC meeting. Yet, there remain significant uncertainties clouding the outlook.”

“Recent economic data have taken a distinct turn for the worse.  Second-quarter GDP growth is now expected to slightly undershoot the Bank of England’s earlier prediction, while the drop in the latest forward-looking purchasing managers surveys heighten the downside risks for the second half.  Although inflation is expected to rise above 3% over the autumn, it is not clear whether the consequent squeeze on real pay and household spending will be offset by improvements elsewhere (notably business investment and net exports).  The outcome of the Brexit negotiations also represents a key risk.” 

“The UK policy outlook is now entering a particularly sensitive juncture. Rising inflation and downside risks to growth pose a significant dilemma for the MPC. For now, we have decided to leave our central interest rate forecast unchanged. But we stand ready to adjust this view if the trade-off between supporting growth and keeping inflation on track continues to shift.  We should get a much sense of this from upcoming economic data and next month’s Bank of England Inflation Report.”