BOE to stay cautious as economy is slowing
On Thursday, 16 March, the Bank of England simultaneously publishes the MPC’s monetary policy decision and the MPC minutes from its meeting. We expect the MPC to vote unanimously to leave the stance of monetary policy unchanged.
The background to the March meeting is the February Inflation Report, when the BoE significantly revised up the outlook for demand (on the back of stronger-than-expected economic activity) but also revised up its estimate of spare capacity (by revising down its estimate of the long run equilibrium unemployment rate from 5% to 4.5%), leaving the outlook for inflation little changed. The Committee kept the guidance that policy could move in any direction to changes in the economic outlook.
Crucially, the news on the month suggests the UK economy is slowing. Retail sales fell quite sharply in December and January, consumer credit has eased, regular pay growth eased, and the services PMI fell more than expected to 53.3 in February and now is 1.9 points below its historical average of 55.1.
In the MPC minutes of its February meeting, there were signs of widening disagreement on the Committee, with the minutes noting that, “For some members, the risks around the trade-off embodied in the central projection meant they had moved a little closer to those limits (to the degree to which above-target inflation could be tolerated)”. And, in a speech on 7 February, Kristin Forbes reinforced her hawkish stance by saying, “If the real economy remains solid and the pickup in the nominal data continues, this could soon suggest an increase in bank rate”. Forbes will leave the MPC on 30 June and, given the mounting evidence that UK economic activity is slowing, which warrants a greater tolerance for an inflation overshoot, the chances of dissent by a minority on the MPC later this year have waned.
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On Thursday, 16 March, the Bank of England simultaneously publishes the MPC’s monetary policy decision and the MPC minutes from its meeting. We expect the MPC to vote unanimously to leave the stance of monetary policy unchanged.
The background to the March meeting is the February Inflation Report, when the BoE significantly revised up the outlook for demand (on the back of stronger-than-expected economic activity) but also revised up its estimate of spare capacity (by revising down its estimate of the long run equilibrium unemployment rate from 5% to 4.5%), leaving the outlook for inflation little changed. The Committee kept the guidance that policy could move in any direction to changes in the economic outlook.
Crucially, the news on the month suggests the UK economy is slowing. Retail sales fell quite sharply in December and January, consumer credit has eased, regular pay growth eased, and the services PMI fell more than expected to 53.3 in February and now is 1.9 points below its historical average of 55.1.
In the MPC minutes of its February meeting, there were signs of widening disagreement on the Committee, with the minutes noting that, “For some members, the risks around the trade-off embodied in the central projection meant they had moved a little closer to those limits (to the degree to which above-target inflation could be tolerated)”. And, in a speech on 7 February, Kristin Forbes reinforced her hawkish stance by saying, “If the real economy remains solid and the pickup in the nominal data continues, this could soon suggest an increase in bank rate”. Forbes will leave the MPC on 30 June and, given the mounting evidence that UK economic activity is slowing, which warrants a greater tolerance for an inflation overshoot, the chances of dissent by a minority on the MPC later this year have waned.
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