Nine members of the Bank of England monetary policy meeting committee had declared to keep interest rates on hold at a record low of 0.25% unanimously at the conclusion of its conference, the last of which for this year. The policymakers also voted 9-0 to retain the bank's bond-buying program target at £435 billion and to carry on with its new plan to purchase up to £10 billion of corporate bonds.
Along with this, Britain’s central bank expects inflation to climb to its 2% target within six months.
The minutes of the meeting also indicated that sterling’s recent strength and recovery in oil prices since the bank’s last meeting are projected to result a slightly lower path for inflation than foreseen in the November inflation report.
In November, bank policymakers cancelled their plan in axing interest rates again and instead adopted a neutral stance for policy, after the British economy suffered much less instant damage from the Brexit vote than early data had suggested.
Sterling has appreciated by over 6% on a trade-weighted basis since the BoE's last set of predictions published on November 3.
The BoE said that: “(This) would by itself point to less of an overshoot in inflation relative to the target in the medium term, though month-to-month volatility was to be expected as market participants' views on the United Kingdom's future relationship with the European Union continued to evolve.”
Previously on Wednesday, as expected, the Federal Reserve raised its main interest rate by 0.25 percentage points to a target range of 0.5-0.75 percent, tightening policy for only the second time in ten years. Some economists believed the BoE would likely be following this move, were it not for doubts created by EU exit talks due to begin early 2017.
BoE policymakers stated there had been little news over the last month about the country’s economy. The global economy had indeed strengthened, but so did the dangers facing it. In specific, the bank said “The global outlook has become more fragile, with risks in China, the euro area and some emerging markets, and an increase in policy uncertainty.”
Smaller Inflation Overshoot
BoE believes inflation is prospective to exceed the target later in 2017 and through 2018.
There are also margins to the degree to which above-target inflation can be tolerated, the bank noted. These limits hinge on the cause of the inflation overshoot, the level of second-round effects on domestic expenses, the progress of inflation expectations, and the scale of the deficit in economic activity below potential .
Data published previously on Tuesday indicated that the UK’s inflation rate surged to a two-year peak of 1.2% in the month of November compared to the same period a year ago, as the steep dive in the British currency since the June Brexit referendum fed through into prices. Average prices were supported by more expensive clothing and Brexit’s impact on the prices consumers paid for technology goods.
In October, inflation fell to 0.9%, requiring BoE Governor Mark Carney to write a letter to Finance Minister Philip Hammond, which the central bank posted on Thursday.
“The MPC remains committed, as always, to taking whatever action is needed to ensure that inflation expectations remain well anchored, and that inflation returns to the target in a sustainable fashion and over an appropriate horizon,” Carney said.
Hammond stated the government had total commitment to the BoE’s operational independence and inflation targeting.
In November, the BoE raised its forecast for economic growth in 2017 to 1.4% from 0.8% previously, though this would still be considered the weakest growth in five years and falls below 2.2% marked in for 2016.
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