Bank of England holds rates as it monitors Brexit impact
Dec 16, 2016 - 12:00 am GMT+3
Dec 16, 2016 12:00 am
The Bank of England decided to keep its main interest rate at a record low of 0.25 percent on Thursday as it capped a volatile year in the wake of the country's decision to leave the European Union.
Though the decision was expected, the pound dropped because the Monetary Policy Committee predicted inflation would rise more slowly than last forecast. That suggests the bank will be under less pressure to raise rates any time soon. Britain's economy has held up much better so far to a Brexit vote than many forecasters expected, though the outlook remains gloomy for the coming months. Fears over the impact prompted the Bank of England in August to cut rates for the first time in more than seven years and expand its economic stimulus program. But at this week's meeting, the policymakers decided to refrain from going further.
The vote was unanimous and the minutes reflect the monetary policy committee's wait-and-see attitude.
"Earlier in the year, the committee noted that the path of monetary policy following the referendum on EU membership would depend on the evolution of the prospects for demand, supply, the exchange rate, and therefore inflation. This remains the case," the committee said in minutes released after the meeting. "Monetary policy can respond, in either direction."
The bank's governor, Mark Carney, has said in the past that volatility and uncertainty would govern the process of Brexit, even though negotiations have yet to begin.
Traders in currency markets have fretted since the June 23 vote and the pound has lost almost a fifth of its value. The lower pound is expected to stoke some inflation by raising the cost of imports like food.
However, since the committee's last meeting, the pound has bounced back up by over 6 percent against a basket of currencies.
"All else equal, this would result in a slightly lower path for inflation than envisaged in the November Inflation Report, though it is still likely to overshoot the target later in 2017 and through 2018," the policymakers said.
The central bank is now predicting inflation will rise to 2.75 percent in 2018, above the bank's 2 percent target. It has already increased to an annual rate of 1.2 percent, from 0.9 percent in October.
The Monetary Policy Committee expects inflation to rise to the 2 percent target within six months.
Analysts like Ian Shepherson of Pantheon Macroeconomic said the central bank seems to be in a neutral stance as it monitors the economy.
"(The committee) repeated its November points that policymakers have "limited tolerance" for above-target inflation, and that rates can move in either direction in response to the evolving outlook, which remains very uncertain," he wrote.
About the author
Research Associate at Center for Islam and Global Affairs (CIGA) at Istanbul Sabahattin Zaim University