Following the Federal Reserve’s decision to raise interest rates by a quarter-point, the Bank of England also made a much-anticipated move this week when its monetary policy group decided to keep its rates at 0.75%.
The committee voted unanimously to leave policy rates unchanged to meet its 2% inflation target so the British economy can help sustain growth and employment.
It also agreed to keep non-financial investment grade corporate bond purchases, as well as UK government bond purchases. The central bank reserves have corporate and government bonds with values listed at £10 billion and £435 billion, respectively. The Fed is reducing its stockpile of government and mortgage bonds.
The BoE’s short-term outlook for global growth is softer now as more downside risks appeared in 2018, particularly in corporate credit markets. The committee also predicts the UK’s consumer price index will drop below 2% in the next several months due to the slide in oil prices. It also expects the UK gross domestic product to rise by “about 0.3%” by the end of its forecast period.
Additionally, domestic inflationary pressures keep mounting. The labor market is tightening despite increases in employment growth, and the committee said unemployment should stay “around 4% in the near-term.”
As for the long-term outlook, the bank said that would “continue to depend significantly on the nature of EU withdrawal,” specifically new trade deals between the European Union and the UK, as well as how households, businesses, and markets react. Monetary policy will come down to such economic forces as supply, demand, and the exchange rate.
Another concern is the now omnipresent Brexit, which the group said has “intensified considerably” since its last meeting, affecting the UK’s markets. Volatility swings, bank funding costs, and high-yield spreads have increased, and more so than in other developed economies. Meanwhile, stocks have tanked, not to mention the depreciation of the sterling.
Despite all these concerns, the bank is committed to keeping its target inflation rate at its 2% target.
The bank will next announce its rate policy thoughts February 7.
Tags: 2019 Economic Forecast, Bank of England, Interest Rates, Monetary Policy