BoE minutes showed a unanimous monetary policy decision at the July meeting, but the differing views about the outlook are starting to emerge. The modest wage pressures mean that the Bank is not in any hurry to start to raise rates, and the first rate hike is not around the corner. The August monetary policy meeting and the inflation report will be interesting.
As expected the Bank of England Monetary Policy Committee voted unanimously to keep the Bank Rate at 0.5% and the issuance of central bank reserve at £375 billion. The focus was expectedly on inflation pressures.
The minutes noted the jump in CPI inflation from 1.5% y/y in May to 1.9% in June, 0.4 percentage points above the Bank staff’s expectations, which would require further analysis, though there were likely one-offs involved. BoE noted the continued robust increases in employment, but at the same time pointed that wage growth had remained surprisingly weak. The minutes noted that given the contradictory signals from employment and wages, uncertainty about the degree of slack had risen on the month and, in light of this uncertainty, an argument could be made for putting more stress on the expected path of costs, particularly wages, in assessing inflationary pressures.
The Committee presented two possible explanations for the contrasting wage and employment data: either the lags involved were longer than previously judged, or the effective supply of labour had increased, resulting in a greater degree of slack.
BoE also noted there were some tentative indications of a modest slowing in output growth, especially in the housing market, which would be reflected in the next set of forecasts in August. The Bank did thus not sound particularly worried over the housing market outlook.
Regarding policy tightening, there were differing views. On one interpretation, the risk of a small rise in Bank Rate derailing the expansion and leaving inflation below the target in the medium term was receding as that expansion became more established. On an alternative interpretation, although the domestic economy was growing at or above longer-term average rates, there was little indication of inflationary pressures building and there was uncertainty as to whether there had been a more structural change in the relationship between the labour market and inflation, while a premature tightening in monetary policy might leave the economy vulnerable to shocks, with the effectiveness of any further stimulus uncertain.
Overall, members had no preset timing for the first increase in Bank Rate, which would be driven by the data. The still weak wage pressures mean the Bank will not be in a hurry to remove stimulus, and we do not expect the first rate hike until next year.
A lot to look forward to in August
Looking ahead, August will be interesting. First, the new inflation report (published on 13 August) will provide the MPC with fresh analysis on the amount of spare capacity and the economic outlook. Second, the incoming Deputy Governor Shafik will join the MPC, marking the third new member in just a couple of months. She commented already earlier that the pace of the recovery was striking and BoE would probably revise down its estimate of the slack in the economy next month. The discussion on the need to start removing monetary policy is thus about to heat up, contributing also to volatility in financial markets.
Nordea