Bank of England holds base rate

by Cheyne Wilcocks MSc, DipPFS | 12th February 2019 | What the papers say

Following the Bank of England's (BOE) Monetary Policy Committee (MPC) meeting, on Thursday 7th February, they unanimously decided to keep the base rate at 0.75%. This has been the rate since August last year when it was raised 0.25% from 0.5%.

As the uncertanties of the Brexit outcome mount the UK ecomony has slowed since the last 0.25% rate rise last August. Added to that, the inflation measure used by the MPC has started to fall to the Bank's target of 2%. It would appear the MPC are unamimous in the decision to sit tight and act accordingly once the uncertainty of Brexit has been removed or drastically reduced. However, notwithstanding the outcome of Brexit, there are some factors giving fuel to possible steady rate rises in the future.

UK prices

As can been seen from the chart below inflation, as measured by the Consumer Price Index (CPI), has started to return to the 2% level targeted by the BOE. The CPI annual rate currently stands at 2.1%. The steady fall is most likely due to the equally steady fall in fuel prices - based on the notoriously volatile oil price.

Source: Office of National Statistics (ONS), https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/d7g7/mm23

However, future price pressure would seem to come from wage growth, currently at an annual rate of 3.4%, greater than the rate of CPI of 2.1%.

Source: Office of National Statistics (ONS), https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours/timeseries/kac3/lms

As can be seen from the chart above there is a visible upturn in the 3 month average in average weekly earnings. If this continues at the current pace it will lead to more descretionary money in the ecomomy leading to upward pressure on prices.

If prices start increasing and the CPI starts moving away from the 2% target the BOE will use monetary policy, or rate rises, to bring it back to their 2% target. Controlling prices and ensuring inflation is at 2% is their primary mandate.

The MPC next meet on the 21st March, a few days before the UK is timetabled to leave the EU on the 29th March. It would be reasonable to assume they will have a much better picture of any Brexit outcome and any affects it may have on the future economy of the UK. We should also see whether the lenders start pricing in any new found certainty into their mortgage rates.

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