MPC keeps Bank Rate, asset purchase programme unchanged

The Bank of England kept its main policy settings unchanged following a meeting of its Monetary Policy Committee on 7 May as economists differed on the likely timing of the first rate hike.

The announcement was delayed in observance of the elections.

Bank Rate was kept at 0.50% and the size of its asset purchase facility at £375bn.

That came ahead of Wednesday's quarterly Inflation Report and a lack of any significant comments from the MPC members since the end of March, due to the purdah period as a result of the election.

Hence, it was possible that the next Inflation Report and the subsequent briefing from Governor Mark Carney would be more closely watched than usually, broker Investec said.

this could move the debate about policy normalisation back up the agenda

"The April MPC's minutes presented UK markets with a hawkish surprise thanks to a couple of references to the 'exceptional' flatness of the yield curve. If the committee issues a reminder of this message on Wednesday, failing to endorse the implicit path of the Bank Rate again, this could move the debate about policy normalisation back up the agenda after a quite few months," Investec's Victoria Clarke wrote in a research note e-mailed to clients.

On the subject of whether the elections had changed the outlook for policy, Clarke believed it had not, or at least not materially.

Political momentum suggests we could see a softening in the pace of spending cuts over the next three years and not more austerity. But such adjustments would likely be relatively minor.

Martin Beck, senior economic adviser to the EY ITEM Club, was a tad more cautious, commenting that: "we continue to expect rates to remain on hold until at least the first quarter of next year, particularly if we see a further fiscal squeeze. Monetary activism is likely to remain the order of the day as far as macroeconomic policy is concerned."

As of Monday morning markets were discounting the first hike in Bank Rate would not arrive until the third quarter of next year, versus Clarke’s forecast for a rise in November in 2015.

However, on 5 May the National Institute of Economic and Social Research (NIESR) forecast Britain’s economy would expand by 2.5% this year and 2.4% in 2016, less than previously anticipated.

That was less than the MPC’s central forecast (at market rates), contained in February’s IR for gross domestic product to grow by 2.9% in 2015 and 2016.

Of interest, Bill Hubard, chief economist at Bankor, pointed out how recent changes such as tax and benefit reforms, improved educational attainment, reduced localized skill bottlenecks have probably reduced the long-term equilibrium rate of unemployment significantly, perhaps to 4.0% or less.

That is also well below the 5.1% long-term equilibrium rate of unemployment which the MPC has been using in its most recent IRs.