Base Rate held at 0.25% but it’s not all good news

The Bank of England Monetary Policy Committee (MPC) today voted to keep the Bank Base rate at 0.25%. Good news for Buy to Let mortgage borrowers, but the reasons are less good for the economy.

2017 Growth forecasts have been reduced again from 1.9% to 1.7% with lower household demand filtering through from the drop in the value of the Pound squeezing prices and household budgets.

The Pound has fallen 0.9% so far against the Dollar after the announcement of the freeze in interest rates, which has a direct impact on foreign exchange rates.

The MPC was this month split more heavily in favour of keeping the rate the same with the “Doves” winning by an increased margin of 6 to 2.

Mark Carney, the Govenor of the Bank of England, held a press report at the announcement saying:

“The UK economy is beginning the process of adjusting to a new, as yet uncertain, economic relationship with the European Union. Monetary policy cannot prevent the weaker real incomes likely to accompany the move to new trading arrangements with the EU, but it can influence how this hit to incomes is distributed between job losses and price rises. And it can support UK households and businesses as they adjust to such profound change.

“The MPC has long emphasised that the effects on inflation of the Brexit process would be the product of its impact on demand, supply and the exchange rate. And it has consistently stressed that as a result, the implications for monetary policy would not be automatic. The August Inflation Report, released today, updates on how these and other dynamics are affecting the economic outlook.

“Since the referendum was called, UK households, businesses and financial markets have reacted at different speeds and to varying degrees to the prospects for the UK’s departure from the EU.

• Financial markets, particularly sterling, marked down the UK’s relative prospects quickly and sharply.
• Households looked through Brexit-related uncertainties initially. But more recently, as the consequences of sterling’s fall have shown up in the shops and squeezed their real incomes, they have cut back on spending, slowing the economy.
• Businesses have been somewhere in between. But since the referendum, they have invested much less aggressively than usual in response to an otherwise very favourable environment.”

To see the full speech Click Here

The official MPC summary reported:

“The MPC’s overall assessment of the outlook for inflation and activity in the August Inflation Report is broadly similar to that in May.  In the MPC’s central forecast, GDP growth remains sluggish in the near term as the squeeze on households’ real incomes continues to weigh on consumption.  Growth then picks up to just above its reduced potential rate over the balance of the forecast period.  Net trade and business investment firm up, and consumption growth recovers in line with modestly rising household incomes.  Net trade is bolstered by strong global growth and the past depreciation of sterling.  The combination of high rates of profitability, especially in the export sector, the low cost of capital and limited spare capacity supports investment by UK firms over the forecast period, offsetting the effect of continued uncertainties around Brexit.

CPI inflation rose to 2.6% in June from 2.3% in March, as expected.  The MPC expects inflation to rise further in coming months and to peak around 3% in October, as the past depreciation of sterling continues to pass through to consumer prices.  Conditional on the current market yield curve, inflation is projected to remain above the MPC’s target throughout the forecast period.  This overshoot reflects entirely the effects of the referendum-related falls in sterling.  As the effect of rising import prices on inflation diminishes, domestic inflationary pressures gradually pick up over the forecast period.  As slack is absorbed, wage growth is projected to recover.  In addition, margins in the consumer sector, having been squeezed by the pickup in import prices, are projected to be rebuilt.  Consequently, inflation remains at a level slightly above the 2% target.”

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