The Bank of England’s Monetary Policy Committee concluded its February meeting by keeping interest rates unchanged and raising the country’s growth outlook. The Committee, which also decided to continue its bond-purchasing program, reiterated that the implications for monetary policy would not be automatic and will continue to tolerate higher inflation. The BoE’s decision came a day after the U.S. Federal Reserve maintained its lending rates in its first meeting after President Donald Trump was inaugurated.
According to CNBC.com, “The bank voted unanimously in its February meeting to keep interest rates at the record low level of 0.25 percent and keep its quantitative easing (QE) purchase targets at up to 10 billion pounds ($12.6 billion) for corporate bonds and 435 billion pounds for U.K. government bonds.”
The MPC also decided to keep inflation rate constant at 2.7 percent for the 2017 fiscal year. Committee members expect that inflation will peak in 2018 and drop to 2.4 percent in 2019.
During these exceptional circumstances, the MPC is required to balance a period of above-target inflation with a period of weaker growth. Since the primary objective of monetary policy is always inflation control, any overshoot of inflation above target must be temporary in nature and limited. The MPC, therefore, has made it clear that its tolerance for above-target inflation is limited.
The Committee has unanimously confirmed that the current monetary policy stance remains appropriate. However, the Committee has also proposed important revisions to its forecast. Growth has remained resilient since the referendum in the United Kingdom. The MPC expects growth to increase over the forecast period and be stronger than it was in November.
The economy is predicted to expand by 2 percent in this fiscal year and continue to rise in the following years. This upgrade is expected to increase the level of U.K.’s output by 1 percent over the next three years, which is greater than what the Committee had anticipated in November. The committee had predicted that growth in the United Kingdom would hit 1.4 percent rather than 2 percent.
This stronger outlook on economic growth is the result of several culminating factors. The first is the chancellor’s infrastructure boost in the November Autumn Statement, which explains fiscal policies in upcoming years and can account for nearly half of the forecast upgrade. Cheaper borrowing rates for households and a rally in the global markets also contributed to the outlook. Together, these factors will continue to shape economic growth, though economists predict the growth to increase for the time being.
In its Monetary Policy Summary, the BoE stated that “The value of sterling remains 18 percent below its peak in November 2015.” This is expected to be a major contributor to the diminishment in household income. The reduced income may essentially deter people from spending money during this fiscal quarter.
In addition to the fall of the sterling, other factors such as “volatility in the currency exchange rate, higher import prices and a bleak outlook for real post-tax household income” may serve as potential difficulties for the U.K. economy.
Though the economy is projected to grow, the unemployment rate in the United Kingdom is anticipated to still hover at around 5 percent, which is an improvement from the current standing 5.5 percent.
An article from CNBC concludes that, “The BOE has acknowledged the economy’s somewhat surprising buoyancy since the Brexit vote which has significantly exceeded its own expectations. However, the central bank has deferred the impact of Britain’s withdrawal from the EU rather than omitted its effect altogether.”
Meanwhile, officials from the U.S. Federal Reserve also voted to keep interest rates unchanged for this fiscal year under Trump’s administration. Due to the unpredictable nature of Trump’s agenda and also due to the fact that Trump was inaugurated into office less than a month ago, the Fed voted to act with caution. So far, there is no indication as to when the interest rates are expected to rise in the United States.
An article from The Wall Street Journal writes that, “Fed officials are watching fiscal policy makers closely because the Fed has concluded that the American economy is growing at something close to the maximum sustainable pace, meaning that, in the Fed’s view, faster growth would probably lead to higher inflation.”
The most direct reason officials chose to act with caution had to do with Trump’s recently proposed economic policies in the realm of regulation, taxation and trade, all of which could affect growth tremendously.