5 to 3 the Doves have it – MPC holds interest rate at 0.25%

by Neil Patterson

13:18 PM, 15th June 2017
About 2 years ago

5 to 3 the Doves have it – MPC holds interest rate at 0.25%

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5 to 3 the Doves have it – MPC holds interest rate at 0.25%

The Bank of England’s Monetary Policy Committee (MPC) have voted 5 to 3 to hold the Bank of England base rate at 0.25%.

This victory by the Doves over the Hawks was closer than expected even with inflation reaching a recent high of 2.9%. Current levels of inflation were not perceived by many to be a long term issue as the fall in Sterling is now feeding through in increased import prices without upward pressure on wage and demand led domestic inflation.

The MPC reported on the decision saying:

“The assessment depended importantly on three main judgements:  that the lower level of sterling continues to boost consumer prices broadly as projected, and without adverse consequences for inflation expectations further ahead;  that regular pay growth remains modest in the near term but picks up significantly over the forecast period;  and that more subdued household spending growth is largely balanced by a pickup in other components of demand.

CPI inflation has been pushed above the 2% target by the impact of last year’s sterling depreciation.  It reached 2.9% in May, above the MPC’s expectation.  Inflation could rise above 3% by the autumn, and is likely to remain above the target for an extended period as sterling’s depreciation continues to feed through into the prices of consumer goods and services.  The 2½% fall in the exchange rate since the May Inflation Report, if sustained, will add to that imported inflationary impetus.

In contrast, pay growth has moderated further from already subdued rates, even as the unemployment rate has fallen to 4.6%, its lowest in over 40 years.”

The MPc also voted unanimously to maintain the stock of sterling non-financial investment grade corporate bond purchases at £10 billion, and to maintain the stock of UK government bond purchases, at £435 billion.

All members of the MPC agreed that if there was a future need to increase the Bank base rate that it would be gradual and limited to ensure a medium term target of 2% inflation.



Comments

Adam Withford

12:35 PM, 16th June 2017
About 2 years ago

Can anyone put this in plain English?

Dylan Morris

9:16 AM, 17th June 2017
About 2 years ago

Yes Adam. The Bank Of England are not doing any more money printing. Interest rates are not going up for a long time as the inflation increase is due to the exchange rate so putting them up won't make any difference.

Old Mrs Landlord

9:29 AM, 17th June 2017
About 2 years ago

Reply to the comment left by "Dylan Morris" at "17/06/2017 - 09:16":

Also that they expect wages and prices to go up, but not by much.

philip allen

11:46 AM, 17th June 2017
About 2 years ago

Don't worry about the lack of QE. Landlords have taken up the slack by pumping money into the economy.

Charles Mackay

8:34 AM, 18th June 2017
About 2 years ago

Reply to the comment left by "Dylan Morris" at "17/06/2017 - 09:16":

Dylan, sorry but you are talking nonsense. You do understand that one of the biggest controls on exchange rates between currencies are the interest rates paid by the respective central banks controlling those currencies don't you???

Higher interest rates help increase demand for a currency. This makes it stronger against other currencies and increases its exchange rate against those currencies. So, actually higher interest rates are EXACTLY what is needed to reduce the exchange rate related inflation we are seeing. The reason the BoE has held off increasing them is that there is a lot of debt in the U.K., but they can only hold off for so long. Otherwise we start to see uncontrollable inflation. The other big problem is that we are not seeing any real wage growth, so this inflation means people have less and less money to spare as cost of energy, food, fuel rises. This is not the kind of inflation that was good for property in the 80's where you could take out a mortgage and in say 10 years the debt had been inflated away due to wage rises.

Take a look at any historic relationship between UK & USA interest rates and you will see that going back from the early 1900's the two have tracked each other closely (almost exactly overlaying each other, and certainly following the same trends in direction). We will have to start raising rates sooner or later, we simply have no choice.

Monty Bodkin

10:49 AM, 18th June 2017
About 2 years ago

Reply to the comment left by "Charles Mackay" at "18/06/2017 - 08:34":

We will have to start raising rates sooner or later, we simply have no choice.

No shit Sherlock, I bet you've been saying the same thing for the last 8 years.

During which time, most landlords have been strengthening their positions either from paying down debt, investing, pensions contributions or paying off their residential mortgages.

When rates eventually rise, landlords will be back to where they originally were but with a decade or more of savings, rent rises and house price increases.

House prices are up nearly 50% since then, your crash will need to be something pretty spectacular to wipe that out.

Charles Mackay

11:06 AM, 18th June 2017
About 2 years ago

Reply to the comment left by "Monty Bodkin" at "18/06/2017 - 10:49":

I was simply pointing out to the previous poster that his understanding is completely wrong and that interests rates are a directl control on currency exchange rates, and that at some point they would need to rise if exchange rates and inflation get too far out of kilter

I did not even mention the word crash, nor did I say that a rise in interest rates would cause a crash.

That is a conclusion that you draw all on your own....

Monty Bodkin

18:26 PM, 18th June 2017
About 2 years ago

Reply to the comment left by "Charles Mackay" at "18/06/2017 - 11:06":

Give it a rest Solz, you don't get banned on here for not following the crashy group think.

Differing views are very welcome provided any spiteful envy is kept within the bounds of polite debate.

Dylan Morris

18:30 PM, 19th June 2017
About 2 years ago

Reply to the comment left by "Charles Mackay" at "18/06/2017 - 11:06":

My understanding is not wrong at all. In your black and white world and according to GCSE economics then an increase in interest rates would in textbook theory increase the value of the Pound. However the world doesn't work like that. There are many other factors to take into account. Very simply a rise in interest rates could, and is likely in my opinion to dampen economic activity, therefore cancelling out the theoretical rise which might be expected if rates went up.
Who's right you or me ? If Zimbabe increased rates would it increase currency demand and strengthen the Zimbabwe dollar ? Most unlikely. But to say my understanding is wrong is not correct, we just have a difference of opinion in the effect that an interest rate rise would bring to the currency at the present time.

Dylan Morris

18:35 PM, 19th June 2017
About 2 years ago

Reply to the comment left by "Monty Bodkin" at "18/06/2017 - 10:49":

Agree with you entirely Monty.

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