AXA’s Page comments on MPC rate policy: Risks have shifted

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The Bank of England’s Monetary Policy Committee (MPC) left policy unchanged today in line with our own and broader market expectations. We have recently adjusted our forecast for the first Bank rate increase to May 2015, from February. Downside risks to the UK outlook have grown over the past month, but we still envisage solid growth in 2015 of 2.7% in line with the IMF’s recent forecast.

“The Bank of England’s MPC today announced that it would leave policy unchanged. Bank rate remains at 0.50% – where it has been since March 2009 – and the Asset Purchase Facility (APF) target was unchanged at £375bn. This was widely expected. The fact that the MPC followed usual practice and issued no further statement was also in line with our expectation and  we await minutes to today’s meeting, published on 22 October, for further information.

“Despite today’s announcement being in line with our expectation there have been a number of developments to the broader economic outlook in the UK that are likely to influence monetary policy over the coming quarters.

  • Employment growth has slowed. The extraordinary growth rate recorded in Spring threatened forcing the MPC into an earlier tightening, but the subsequent slowdown – that we had anticipated – has removed this near-term pressure.
  • Economic outlook has softened.  This has primarily reflected weaker global conditions impacting manufacturing output and a softening in the domestic housing market. The MPC has for some time warned of a softening, but we still expect solid and sustainable expansion in the coming year – but slower than the 0.9% quarter-on-quarter growth recorded in Q2.
  • Softer inflation outlook. We have lowered our outlook for UK CPI inflation to fall below 1.5% by year-end and not to pick up quickly over H1 2015, primarily reflecting the development of international commodity prices, including oil, against a backdrop of still weak domestically generated inflation pressures.

“We recently pushed back our expectation of the first tightening in UK monetary policy to May 2015, from February. This decision primarily reflected our revised inflation outlook. We consider more recent developments to add to downside risks to the UK outlook. Our central forecast remains for solid expansion, in line with the IMF’s new outlook for the UK of 2.7%, which we see gradually tightening the labour market further and expect faster wage growth to emerge across the important January – April wage round next year. This is likely to see unit labour costs begin to rise and encourage the Committee to embark on the first tentative increases in what we expect to be a very gradual tightening cycle. We forecast Bank rate to close 2015 at 1.00%.”

David Page, Senior Economist at AXA Investment Managers

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