The Bank of England’s latest bundle of decisions and analysis is out, and the headlines are basically unchanged. The rate-setting monetary policy committee (MPC)
voted 8-1 to keep interest rates where they are.
Resident hawk Ian McAfferty voted to increase Bank Rate by 0.25 percentage points, as he has done in the last few meetings. Analysts have continually suggested that one or even two other members of the committee will join him, but that still hasn’t happened yet.
Bank Rate, the BoE’s benchmark interest rate, has been at 0.5% since March 2009.
The latest inflation report from the Bank is also out — it’s the quarterly update in which the BoE offers its view of the domestic and global economy, and the prospects for the years ahead.
To sum it up — Britain’s fine. The rest of the world, not so much.
The expected performance of the domestic economy is basically unchanged from August’s inflation report, as far as the Bank is concerned. It’s a recovery driven by strong domestic demand — employment’s going to keep growing, productivity should pick up, respectable wage growth will return. On that front, the BoE is where it was in August.
On the other hand, the global situation is not looking so strong. Though advanced economies aren’t sagging too much, emerging economy growth was 4% in the second quarter, as opposed to the 4.25% the Bank expected. Oil prices are 14%. In the MPC’s minutes, the members noted that “recent data news in the international economy had on balance continued to be disappointing.” For a small and relatively open economy like the UK, what happens abroad matters.
Between those two points — a British economy that is doing pretty much as expected, and an international economy that’s doing worse — the Bank seems more or less happy to give the appearance of sitting on its hands as market expectations for a rate hike drift further and further into the future.
Governor Mark Carney often offers hints in his own speeches that the Bank may soon stop sitting on its hands, but that isn’t really reflected either in the MPC’s votes, minutes, or the inflation report. Some months ago, Carney said that investors would have a better idea of the path of rates by the turn of the year. With less than two months to go, that’s looking questionable.
At the time of August’s report, markets expectations (based on the yield curve) expected the first interest hike in about Q2 2016, about nine months in the future from that point. But the market rate expectations used in the October report only show rates rising in Q1 2017, about 15 months out into the future (and 18 months from the August report).
Despite that, the Bank’s forecasts for inflation and growth — which are based on the yield curve — have barely changed. The forecast for inflation two years from now is at 2.1%, as opposed to the 2% that was suggested in the August inflation report, pretty close to identical. Three years out, inflation is at more like 2.5%.
Since the Bank’s medium-term inflation target is 2%, it seems that they’re pretty comfortable with that.
Expectations for the first post-crisis rate hike have been brought forward a little bit since the BoE stopped collecting data for Thursday’s report (on 28 October), with rates expected to rise around the end of 2016 as of Wednesday. But the overall picture is of a central bank that isn’t particularly interested in warning investors that a rate hike is coming sooner than they expect. We’ll have to see if that changes when Mark Carney gets up to speak at the BoE press conference, which begins at 12:45 p.m. GMT (7:45 a.m. ET).
Two members of the MPC, McCafferty and Weale voted for a rate hike during a period of 2014, but late last year as oil prices and inflation began to slump, it went back to being a unanimous vote in favour of unchanged policy.
Here are the projections for the economy that it’s all based on, for 2016:
- Business investment growth of +7.5% (up from +7.25%).
- Export growth of +2.5% (same).
- Employment growth of 1% (down from +1.25%).
- Average weekly earnings growth of 3.75% (same).
One of the more wonkish revalations in the report is to do with quantitative easing (QE). The Bank has said for several years that it wants to raise interest rates before it sells off any of the bonds it’s bought with its QE purchases, but what hasn’t been quite as clear is what the Bank will do with its earnings on those bonds.
At the moment they’re re-investing the coupon payments they get for holding the bonds, and when any of them mature they’re also replaced with more bonds. For example, a 10-year bond pays a certain percentage coupon for those years, then the Bank gets its original investment back, and buys another 10-year bond.
It wasn’t clear whether the Bank might stop re-investing (and buying new bonds), but they have now made clear that they will continue to re-invest until they decide to actively unwind QE and sell off those bonds.
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