The Bank of England MPC decision

Commentary on this month’s MPC decision, Chris Williamson, said:

“The Bank of England left interest rates unchanged at the Monetary Policy Committee’s May meeting, in line with expectations that policymakers would back away from hiking borrowing costs after a flurry of disappointing economic data and a steeper than expected cooling of inflation. However, two of the MPC’s nine members again voted to raise rates, and the door is left open for a rate hike in coming months, dependent on the soft patch at the start of the year proving to have been temporary.

“Back in April, the financial markets had priced-in a near certain May rate hike. Policymakers had set the scene for a further tightening of policy following the first rate rise for a decade last November. However, since the last meeting, GDP growth is estimated to have almost stalled at 0.1% in the first quarter, and business surveys suggest the rate of expansion remained disappointingly meagre at around 0.2% at the start of the second quarter.

“The Bank of England has consequently downgraded its economic growth forecasts for 2018, from1.8% to 1.4%, reflecting the slower than anticipated start to the year, but kept 2019 and 2020 projections largely unchanged at1.7%, down from 1.8%.

“The unchanged medium term outlook leaves expectations alive for rates to rise later in the year, likely August, highlighting how policymakers believe the recent weak start to 2018 to have been a temporary soft patch, linked mainly to heavy snowfall.

“However, the Bank is also worried that the underlying pace of economic growth may have in fact waned so far this year. Survey data suggest that some of this slowdown can be linked to weaker economic growth in continental Europe, but companies are also reporting that domestic demand among households and businesses has continued to be dampened by uncertainty about the economic outlook and higher prices.

“Furthermore, while annual wage growth has picked up, favourable base effects (with weak pay growth last year) have flattered the picture.

“The data in the next few months will therefore be watched closely for clues as to the next policy move, and could also be crucial for the MPC’s credibility. Unless both wages and the pace of economic growth pick up in coming months, the chances are that an August rate hike can also be ruled out. What’s more, the November rate hike will also start to look increasingly like a policy error. The next major clues come with the May PMI surveys data, which will give an important steer on second quarter GDP growth.”