BoE MPC September meeting preview.
Looking ahead to the 14th September & the Bank of England Monetary Policy Committee Meeting…
The Bank of England Monetary Policy Committee will meet for the sixth time this year on the 14th September, and will once again vote on the level at which to fix the UK’s base rate in order to maximise economic growth.
Rewind three months and the release of the minutes from the June meeting shocked the market when three of its eight members voted in favour of a rate hike, the first time this split has occurred since May 2011. It seemed apparent at this point that there was far more optimism in the state of the UK economy amongst policy makers than amongst leading economists, whom in the pre-meeting polls predicted that policy maker, Kristin Forbes, would be the lone voice for increase in a 7 versus 1 in favour of hold outcome.
The media response was immediate, with many articles circulating thereafter predicting a rate increase was imminent, fuelled by the growing split in opinion between the committee’s members. Borrowers understandably scrambled to their nearest financial advisers and internet comparison websites to hunt out the best ‘fixed rate’ mortgage deals on offer, to sure up their immediate financial futures in the face of imminent increases in banks variable rates.
Come the next meeting in August, where voting was back to 6 versus 2, it seemed that some of those MPC members’ optimism had perhaps waivered on the frustrating lack of clarity over what a post-Brexit UK might look like. Cue hand to head slap by those borrowers who took up the chance to take up a fixed mortgage rate between June and August. Looming economic uncertainty surrounding the UK’s post - EU trading framework is indisputably the biggest factor influencing the decision to leave the rate low, while inflation remains higher than ideal.
Brexit implications aside, the increasing cost of living and stagnating wage levels mean that any rate increase would likely hit Joe Public too hard, causing economic recovery to halt. Any shock to the average household caused by a base rate increase could cause a wave of instability, one that might call for a larger emergency reduction to the base rate than it would have to offer in positive points. With limited monetary options available to correct, and very little chance that the MPC would vote to go negative, the weight of responsibility could shift to last resort fiscal measures- the political suicide that this government and those that have come before it have sought to avoid at all costs!
The market consensus now appears to be that inflation will peak towards the end of the year, at which point it will then begin to decline through 2018 back to acceptable levels. The MPC will likely once again minute a maximum count of 2 in favour of hike, with the majority remaining firm in their resolve that base rate remains at the most appropriate level. The inflationary curve will re-align with the 2% target ‘naturally’ as growth in wages starts to outpace it, and on this basis, we could see the record low-level base rate of 0.25% continue into 2019.