(Telestock) – The Bank of England followed the ECBanticipating the rate cut promised by the Fed in September. The Monetary Policy Committee (MPC), which met today, decided to cut interest rates for the first time in two yearsmaintaining a forward-looking approach to monetary policy, in an attempt to support growth and ensure that inflation returns to the 2% target.
At today’s meeting, the Board voted with a majority of 5–4 a 0.25 basis point reduction in the bank rate which now stands at 5%. The four members who voted against would have preferred to keep the bank rate still at 5.25%.
The bankers have in fact judged “it is appropriate to slightly reduce the degree of political restrictiveness”. The impact of past external shocks has subsided and some progress has been made in moderating inflation risks. Although GDP growth has been stronger than expected, the tight monetary policy stance continues to weigh on real economic activity, leading to a looser labour market and dampening inflationary pressures.
At its August meeting, the BoE also published the updated set of growth and inflation projectionswhich 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.
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.