The July meeting of the Bank of England’s Monetary Policy Committee (MPC) concluded last week with the bank rate left unchanged at 0.5%.
The decision was not unanimous, with one MPC member voting for an “immediate loosening of monetary policy”.
The bank rate has been kept at 0.5% since March 2009.
The BoE’s decision to leave the rate unchanged in July disappointed versus market expectations.
The consensus in the lead-up to the meeting was that the Central Bank would likely cut interest rates by 25 basis points to 0.25%.
However, the meeting statement and minutes did provide a clear signal that policy easing was likely in August.
The MPC stated that it was “committed to taking whatever action was needed to support growth and to return inflation to target”.
To achieve this, most MPC members at this month’s meeting “expected monetary policy to be loosened in August”.
At that stage, the Bank will have had time to undertake a full economic assessment in conjunction with the preparation and publication of the August inflation report.
At this month’s meeting, the MPC had an “initial exchange of views on possible packages of measures” that it could use (this could include a combination of rate cuts and an increase in its asset purchase programme).
The minutes noted that the “exact extent of any additional stimulus measure would be based on the Committee’s updated forecasts” which will be contained in next month’s inflation report.
The current policy deliberations within the Central Bank are taking place against a backdrop of heightened uncertainty in the aftermath of the referendum vote in favour of a UK exit from the EU.
At the same time, inflation, at 0.3% in May, remains “well below” the 2% target.
The Central Bank is of the view that the shortfall in inflation versus target is “due predominantly to unusually large drags from energy and food prices which are expected to attenuate over the next year”.
Its economic assessment of the referendum impact is limited by the lack of official data covering the period since the vote.
However, it said that there “are preliminary signs that the result has affected sentiment among households and companies”.
The MPC referenced business and consumer confidence surveys.
Already, a measure of UK consumer confidence released since the referendum recorded its largest monthly fall in 21 years in July.
The Central Bank also discussed reports that “some businesses are beginning to delay investment projects and postpone recruitment decisions”.
In fact, business investment had already fallen for two consecutive quarters in the lead up to the referendum.
In its assessment of the housing market, it stated that survey data “point to a significant weakening in expected activity”.
Looking ahead, the Bank of England remains on heightened alert that “a vote to leave the European Union could have material implications” for the UK’s economic outlook.
The severity of this “would depend on the degree and timing of any further retrenchment in business investment and the flow through to households via the labour market”, all of which could “take some time to gauge”.
The UK economy is facing into a period of elevated economic uncertainty. This is likely to weigh on consumer spending, the key driver of growth in the past few years.
Business investment is also likely to be further adversely impacted by Brexit-related uncertainty, following on from declines in the last two quarters.
Employers may hold off on hiring new workers amid expectations of a weaker pace of growth and a lack of clarity over future access to the EU’s single market.
The negotiating process to decide on the UK’s EU exit terms and agree a new trading arrangement could drag on for a number of years.
The outcome of these talks will, ultimately, determine the long-run implications of Brexit for the British economy.
In the meantime, the sharp fall in sterling could boost UK exports to some extent, while monetary policy easing may also help mitigate some of the negative effects.
Overall, though, the impact of the referendum is still likely to be negative.
We expect that the current uncertainty could result in UK GDP being around 3% lower between now and the end of 2018.
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