A comment on the MPC

6 August 2020

This morning the Bank of England released its latest Monetary Policy Report. In this Macro Flash Note, Daniel Murray provides a quick summary.

Table 1. A summary of the Bank of England’s latest forecasts

Source: Bank of England, EFG calculations

  • Following the August 2020 meeting of the Bank of England’s Monetary Policy Committee, Bank Rate was left unchanged (0.1%) as was the size of the Bank’s asset purchase programme (£745bn in total, an increase of £300bn this year).
  • The Bank believes Q2 UK GDP data will show a QoQ contraction of 21.0% when released next week. GDP is expected to rebound strongly in Q3 with the pace of recovery slowing thereafter. The rebound will be driven by gains in household consumption expenditures with a weaker recovery in business investment.
  • UK GDP is expected to contract by 9.5% in 2020 but then rebound by 9.0% in 2021. The level of GDP will not exceed the end Q4 2019 level before the end of 2021 at the earliest, implying significant amounts of excess capacity.
  • Inflation trends are expected to be weak as a result of the excess capacity. Headline CPI inflation is expected to decline to just 0.25% in 2020 before rebounding to 1.75% next year and 2.0% in 2022 as excess capacity is reduced. 

Table 2. A summary of the Bank’s forecasts relative to the market

Source: Bank of England, EFG calculations

  • The Bank’s outlook is optimistic relative to market expectations and has not changed meaningfully from the last report – see Table 2. 
  • The path of GDP is highly uncertain, dependent on the evolution of the pandemic. The Bank committed to keep policy accommodative, noting that it “stands ready to adjust monetary policy accordingly to meet its remit” and that the MPC “does not intend to tighten monetary policy until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably”.
  • Speculation has been building that the Bank will at some point lower Bank Rate below zero. The Monetary Policy Report included a section discussing the pros and cons of negative rates. The section discussed in particular the transmission mechanism. On balance it seems that the Bank of England continues for the time being to prefer other tools – asset purchases and forward guidance - to negative rates, concluding that “negative policy rates at this time could be less effective as a tool to stimulate the economy”.