Macro insights

What happened at the Monetary Policy Committee meeting?

On what has become known as ‘Super Thursday’, last week on 8 February, the Bank of England (BoE)’s Monetary Policy Committee (MPC) announced its latest decision on interest rates, published the minutes of its previous meeting and released its quarterly Inflation Report.

As expected, the nine-strong MPC left the monetary policy unchanged, its current asset purchase programme in place and interest rates at 0.5%.

What was less expected was the MPC’s statement. The committee meets eight times a year and is responsible for setting the monetary policy in order to meet the BoE’s inflation target of 2%.

Currently, the inflation rate is 3%, one percentage point above their target, and has been like this for some time. While it has been trying to coax the UK economy back to health, the BoE has been happy to have the inflation rate higher than its target but things have now changed.

In its latest Inflation Report, the BoE upgraded its GDP growth forecasts and now expects expansion of 1.8% in both 2018 and 2019, respectively up from 1.6% and 1.8% in November. It also shifted its inflation projections to take account of the impact of a firmer sterling and slightly higher growth and oil price expectations.

These changes, while modest, were enough to prompt the BoE to say that, should the economy evolve in line with its expectations, “the monetary policy would need to be tightened somewhat earlier and by a  greater degree...than anticipated at the time of the November 2017 Report”.

At AXA Investment Managers, we have highlighted since November, that the MPC’s guidance  - at the time, two rate hikes over the coming three years - was likely to prove too dovish.

Our current forecast includes three rates hike by the end of 2019, including a rise in August 2018. The question posed by Thursday’s developments is whether or not the MPC is moving ahead of our more hawkish outlook?

It is a question to which there are no easy answers, especially given that market volatility is expected to increase further this year.

Our latest piece on riding the expected rise in volatility goes into more detail on the build up to a structural shift in markets in 2018, as we face a greater withdrawal of liquidity than we have seen in years.

While a May rise is clearly now a possibility, such a move would depend on the evolution of data over the coming months, and our assessment is that the BoE fell short of signalling a May hike and we retain our call for an August rise, but acknowledge the risk that it could move sooner. What is clear, especially given how quickly things can change, is that the BoE has provided itself with some deliberate uncertainty.

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