The Bank of England’s Monetary Policy Committee has voted by a majority of 7-1 to maintain Bank Rate at 0.25%, with Kristin Forbes voting to increase Bank Rate by 25 basis points.
In its latest meeting, the MPC judged that inflation will remain close to trend, but hinted that “monetary policy could need to be tightened by a somewhat greater extent” if the economy follows the path outlined in its May central projection.
At its May meeting, seven members thought that the current monetary policy setting remained appropriate, if the adjustment to the United Kingdom’s new relationship with the European Union is smooth, and that Bank Rate follows the market-implied path for interest rates.
The Committee stressed, as in previous meetings, that “there are limits to the extent to which above-target inflation can be tolerated”.
In its minutes, the MPC said: “The continuing suitability of the current policy stance depends on the trade-off between above-target inflation and slack in the economy, as well as the prospects for inflation to return sustainably to target.
“These projections depend importantly on three main judgements: that the lower level of sterling continues to boost consumer prices broadly as projected, and without adverse consequences for inflation expectations further ahead; that regular pay growth remains modest in the near term but picks up significantly over the forecast period; and that more subdued household spending growth is largely balanced by a pickup in other components of demand.”
The MPC said that it cannot prevent the “necessary real adjustment” required as the UK leaves the EU, “or the weaker real income growth that is likely to accompany that adjustment over the next few years”.
It believes that attempting to offset fully the effect of weaker sterling on inflation would be achievable only at the cost of higher unemployment and even weaker income growth.
The minutes explained: “For this reason, the MPC’s remit specifies that, in such exceptional circumstances, the Committee must balance any trade-off between the speed at which it intends to return inflation sustainably to the target and the support that monetary policy provides to jobs and activity.”
The MPC expects inflation to rise further above the 2% target in the coming months, peaking a little below 3% in the fourth quarter.
Tom Stevenson, investment director for Personal Investing at Fidelity International, said: “No big surprises at today’s Super Thursday announcement, where the Bank of England revealed its hand on interest rates, released the latest MPC meeting minutes and crucially, presented its quarterly inflation report. Seven out of the eight members of the MPC voted to leave rates unchanged at 0.25%. However, the Bank indicated that if the economy continues to recover as it expects then interest rates may need to rise more quickly than the market currently expects.”
Rob’s comments: If the interest rate rise significantly how will the economy and banks recover from the large amount of repossession hitting the market. Last week it was reported that a large proportion of the public are borrowing to fund their current life styles so, what happens when house payment, loan and credit card payments raise significantly? People will just cut back on their life style. Well history shows us “NO”. Go bankrupt is what will happen.