Why the Bank of England May Be Rushing to Remove Monetary Stimulus



Key takeaways from the June BOE minutes

The BOE’s (Bank of England) monetary policy meeting minutes from the June meeting noted that the continued growth of employment could erode spare capacity and reduce the tradeoff that the MPC (Monetary Policy Committee) still needs to balance. But a mix of weaker consumption and increasing demand in some sectors is likely to balance and influence the inflation projection and the interest rate outlook.

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There was a hawkish turn in the meeting, however, with three members of the MPC voting for a 0.25% rate hike. These members appeared to be worried about rising inflation, which spiked to 2.9% in May, prior to the meeting on June 8. The repo rate was left unchanged at 0.25% and the QE (quantitative easing) total was left at 435 billion British pounds for UK gilts and 10 billion pounds for corporate bonds.

Confusion at the BOE’s MPC

At a meeting on June 28, BOE Governor Mark Carney noted that “some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional.”

Carney said that in the last MPC meeting, it was “too early to judge with confidence how large and persistent the slowdown in growth would prove,” given the mixed signals from consumer spending and business investment.

Other members of MPC had mixed views about rate hikes. The BOE’s Ian McCafferty has advocated a rate hike, while Gertjan Vlieghe has argued that hiking too early would be worse than hiking too late.

The path forward for the BOE

We can expect that caution will remain high at the BOE in the near term. Higher levels of inflation, which came as a result of a steep decline in the pound (FXB) against currencies like the US dollar (UUP) and the euro (FXE), are likely to stabilize following the recent appreciation of the pound (GBB).

Meanwhile, Brexit negotiations and the delicate political situation in the UK weren’t mentioned in the most recent meeting, though these factors could still impact the UK (EWU) economy. If economic conditions keep improving, we could expect a gradual move toward normalization from the BOE, but for the time being, it appears that the MPC will most likely keep waiting.


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