No change at Threadneedle St today came as no surprise, but after the 5-3 division to keep rates on hold in June, it’s wise not to rule anything out. Alongside the immediate decision we had the usual banquet of minutes, Inflation Report and press briefing. So was there much to report from August’s Super Thursday?
Bank rate, asset purchases and the duration of the term funding scheme were once again unchanged at the August meeting. With one of June’s hawks – Kirsten Forbes – now departed, and new member Silvana Tenreyro voting with the majority at her first meeting, this left Ian McCafferty and Michael Saunders again voting for a 25 point increase.
While the decision wasn’t breaking news there were, inevitably some new forecasts developments in the latest Inflation report.
GDP expectations revised down to 1.7% and 1.6% in 2017 and 2018 from 1.9% and 1.7% respectively in May
Downgraded view on potential growth rate from around 2% to 1.75%
Inflation expected to remain above target at the end of the forecast period
(Much) Lower unemployment rate included in forecasts.
For us the not so big news was the downgrade to growth expectations this year and next. This partly comes on the back of the weak GDP numbers since the start of this year and has moved in line with the consensus view. A few tenths of percentage point does not make headlines.
Indeed, the assumptions of squeezed consumers being somewhat offset by a boost in net trade (thank you world economy and weak pound) and some growth from business investment is broadly consistent with the Bank’s outlook in May.
What’s driving their thinking on growth?
The view is that consumers will soon be over the worst. While the lower unemployment expectations are accompanied by a reduced wage growth forecast in the next few years, projections imply that the squeeze on incomes will end next year.
Once again, and not surprisingly, there is some uncertainty about the investment outlook. It’s one of those … ‘on the one hand’ variables. On the one hand profits are good, business is picking up and the cost of capital is low. On the other, there’s Brexit. While business investment growth is pencilled in this year and next, the pace of increase is subdued and lower than that predicted three months ago. Either way, this will have implications on the supply side and productivity over the longer-term.
So Brexit bites?
It would seem so, the press conference commentary highlighted the uncertainty effects on investment and the direct impact on consumers from increasing import prices. The assumptions underpinning the forecasts are still that households and businesses are working on the basis of an orderly transition out of the EU. Given some potential HM government negotiating milestones between now and the November inflation report – the language around this will be worth paying attention to.
Right, what the report is all about. Imported inflation is responsible for the current above target inflation and we sensed a slight shift in tone on the evolution of domestically generated inflation in keeping CPI elevated in the short term, compared to forecasts in May.
With spare capacity being eroded over the forecast period and wage rises in the pipeline for next year, central forecasts point to CPI drifting down, but remaining above target. Clearly this is sufficient for a couple of MPC members to think a reversal of the emergency support last August should be reversed.
What’s our takeaway from this?
It’s fair to say that there have been some mixed messaging from the Committee since the last Report in May. Despite some expectations that this might be laying the ground for a rise sooner rather than later, the meat of the forecasts still has most members not for turning.
But for me, it wasn’t entirely unequivocal. As a couple of notable economic brains have identified, the judgement that the UK’s potential growth has been reduced may lower the bar for a rise. And the addition of the view in the minutes that if everything follows the Bank’s Central forecast then we might need a bit more tightening that that implied by the yield curve, probably means it’s still wise not to rule anything out.