Bank of England’s Monetary Policy Committee votes to keeps UK Bank Rate at record low of 0.5%

Britain’s central bank, the Bank of England, announced on Thursday that its Monetary Policy Committee (MPC) has declared that the Bank Rate will be kept at a record low of 0.5% and will maintain the Asset Purchase Programme at GBP375bn.

Monetary policy is set by the MPC, which aims to meet the 2% inflation target in a way that helps to sustain growth and employment. The MPC voted by a majority of 8-1 to maintain Bank Rate at 0.5% at its meeting ending on 6 October. The vote to maintain the stock of purchased assets financed by the issuance of central bank reserves at GBP375bn was unanimous.

In August, the twelve-month CPI inflation was recorded at 0%, well below the 2% target rate. According to the Bank of England, about three-quarters of that deviation was reflected in unusually low contributions from energy, food and other imported goods prices, while the other quarter reflects the past weakness of domestic cost growth. Despite an increase in labour costs, these remain lower than would be consistent with meeting the inflation target in the medium term, were they to persist at current rates. Core inflation continues to be subdued at around 1%, which is influenced by restrained labour cost growth and also by muted import cost growth.

As a result of below target inflation and the possibility that spare capacity remains in the economy, the MPC said it intends to set monetary policy so as to ensure that growth is sufficient to absorb any remaining underutilised resources. This policy is necessary to ensure that inflation is on track to return sustainably to the 2% target rate within two years and is expected to support domestic cost growth.

According to the Bank of England, the most recent official estimates and survey data are consistent with a gentle deceleration in UK output growth since a peak at the beginning of 2014. Since the middle of 2013, there have been sharp declines in the unemployment rate, however the rate now appears to have levelled off. The MPC had expected some slowdown in the pace of the expansion and employment growth, as a natural consequence of the economy approaching a balance between its supply capacity and strengthening demand following the UK’s gradual recovery from the financial crisis. But it said there is increasing evidence that capacity pressures are developing in some segments of the economy, especially with a shortage in labour skills. In the private sector, annual regular pay growth has increased and is now more than 3%, but improvements in productivity growth have so far limited the impact of that pickup in pay growth on businesses’ overall costs, and therefore inflation, the MPC added.