There Bank of England follows in the footsteps of the ECB and play ahead compared to Federal Reservewhich just yesterday confirmed the possibility of a rate cut in September. The decision to reduce for the first time in two years the cost of money, maintaining a forward-looking approach to monetary policy, aims to support growth and ensure that inflation returns to the 2% target at the same time.
What the Board decided
At today’s meeting, the Board voted with a majority of 5–4 for a reduction of 0.25 points base of the bank rate which now stands at 5%.
In making this decision, the bankers judged “it is appropriate to slightly reduce the degree of political restrictiveness” as the impact of external shocks has subsided and some progress has been made in moderating inflationary persistence risks. And at the same time, while GDP growth has been stronger than expected, the tight monetary policy stance continues to weigh on the real economy, leading to a looser labor market and dampening inflationary pressures.
THE four members who voted againstthey would have preferred keep the bank rate still unchanged at 5.25%, placing greater emphasis on inflationary pressures.
BoE’s new forecasts
The BoE also published today the updated set of growth and inflation estimateswhich confirm that price growth is aligned with the target and that economic activity is slowing down.
Both in May and June, inflation aligned with the 2% target, but inflation is expected will increase to around 2.75% in the second half of this yearas last year’s energy price declines are not factored into the annual comparison, more clearly revealing the persistence of domestic inflationary pressures. Average weekly growth in private sector corporate profits fell to 5.6% in the three months to May, while services inflation eased to 5.7% in June.
This year the GDP has recorded a rather marked recovery, but it momentum now appears weaker. GDP fell below potential and the labor market loosened further.
The Board recognized that the inflation decline and normalization of many indicators of inflation expectations continue to translate into a weakening of wage dynamics and price fixing. It is therefore expected that the domestic inflationary pressure will ease in the coming years, due to the restrictive stance of monetary policy.
Policy remains restrictive
There monetary policy – reiterates the BoE – will have to continue to remain restrictive for a sufficiently long period until the risks of a sustainable return of inflation to the 2% objective over the medium term have further dissipated. The Committee continues to monitor closely the risks of persistent inflation and will decide at each meeting on the appropriate degree of monetary policy tightening.
