Today was remarkable for UK monetary policy - the MPC’s decision, the minutes of the meeting, and the Inflation Report were released simultaneously for the first time; and one member voted to raise the Bank rate for the first time in eight months.
The Bank of England’s monetary policy committee decided to keep the main refinancing rate at a record-low 0.5%. The minutes of the meeting showed that, for the first time this year, one of the nine members voted to raise the Bank rate by 25 basis points. In general, the tone of the minutes was more hawkish than previously. The transcript emphasized that policymakers remain focused on domestic-demand driven inflation pressures, in particular, that the spare capacity in the labour market has continued to shrink. Also, the minutes played down the drag on inflation from the sharp fall in crude oil prices earlier this year and lower import prices via the stronger pound.
The Inflation Report showed the annual inflation forecast for the end of 2016 was revised down slightly to 1.5%, while that for late 2017 was unchanged at 2.1%. The BoE targets an annual inflation rate of 2% in the medium-term, that is, in one to three years’ time. Overall, the minutes and the Inflation Report suggest that the Bank rate will start to rise early next year.
There’s nothing in any of this to surprise manufacturers, who should be able to manage a gradual normalization of monetary policy starting at the turn of the year providing the pound does not significantly appreciate.
The changes in the timing of the minutes and Inflation Report aim to improve the transparency of the BoE’s decision making, which should reduce uncertainty about the rationale underlying the committee’s thinking. Previously, the Inflation Report and minutes were out one and two weeks after the MPC announcement, respectively.
Deputy Chief Economist is standing by for the press conference and may return to the blog with take 2....