The Bank of England’s Monetary Policy Committee has voted unanimously to maintain Bank Rate at 0.25% but is prepared to “respond, in either direction”, to changes to the economic outlook to ensure a sustainable return of inflation to the 2% target.
In the minutes of its latest meeting, the Committee says that if spending growth slows more abruptly than expected, there is scope for monetary policy to be loosened. “If, on the other hand, pay growth picks up by more than anticipated, monetary policy may need to be tightened”, the MPC said.
It has increased its expectation for growth in 2017 to 2.0% and now expects growth of 1.6% in 2018 and 1.7% in 2019.
More : BoE holds bank rate but predicts 2% inflation in six months
The Committee said the upgraded outlook reflects the fiscal stimulus announced in the Autumn Statement, firmer momentum in global activity, higher global equity prices and more supportive credit conditions, particularly for households.
Domestic demand has been stronger than expected over the past few months, and there have been “relatively few signs” of the slowdown in consumer spending that the Committee had anticipated following the referendum.
However it believes continued moderation in pay growth and higher import prices following sterling’s depreciation are likely to mean materially weaker household real income growth and lower household spending.
The projected path of inflation is therefore similar to the one expected in November, despite the stronger growth outlook.
The value of sterling remains 18% below its peak in November 2015, and a continuation of weaker sterling is is expected to boost consumer prices and cause inflation to overshoot the 2% target.
The Committee says this effect is already becoming evident in the data – CPI inflation rose to 1.6% in December and the MPC says “further substantial increases are very likely over the coming months”.
Ben Brettell, Senior Economist at Hargreaves Lansdown, commented: “Unsurprisingly interest rates were left on hold, but the minutes noted that some MPC members were getting a little closer to the limits of their tolerance for higher inflation. This could mean we see the first interest rate rise in more than a decade at some point this year, particularly if wage growth turns out stronger than expected.
However I still feel this is improbable. The most likely scenario is that higher inflation and weaker pay growth will squeeze household budgets, meaning consumer spending is likely to slow in real terms. The Bank is unlikely to take the risk of raising borrowing costs in this environment. If it does happen, I would expect rates to remain at their previous low of 0.5% for some significant time afterwards.”
Rob’s Comments. This is good news for borrowers because it means low monthly mortgage payments but I feel for the savers.