The August policy announcement of the Bank of England saw that the Monetary Policy Committee voted to deliver a multifaceted policy package, with a reduction in the Bank Rate to 0.25 percent as part of the suite of measures, noted Lloyds Bank in a research report. During its November meeting, the policy was kept on hold as expected; however, the MPC also abandoned its earlier policy guidelines for additional loosening in favour of a ‘neutral’ policy bias. This was a more hawkish stance than anticipated.
The updated MPC projections in November and the more recent MPC communications both do not indicate any inclination to hike rates in the near future. But the MPC’s change of view shows a more downbeat assessment of the economy’s supply potential.
“GDP growth is put at just 1.6 percent in the outer year of the forecast, 2019, attributed to a more pessimistic post-referendum outlook”, noted Lloyds Bank.
The Bank Rate is expected to remain on hold for the foreseeable future; however, there is a skew towards tighter policy, according to Lloyds Bank. The Monetary Policy Committee’s updated projections indicate that the largest overshoot of inflation in comparison to target on record would look through this likely upsurge in inflation.
The aversion to countering the rise in inflation with tighter policy would only continue to be true of second-round impacts on wages and inflation expectations remain curbed in the medium term. If the post-referendum slowing in demand comes out to be more modest that what the MPC expects, anxiety regarding the upcoming surge in inflation would become more valid. However, in the near-term, tighter financial conditions resulting from the global increase in bond yields, along with remaining downside risks to activity from a likely resurgence in uncertainty, would obviate the requirement for an early tightening, added Lloyds Bank.
