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Thomas StorringDirector – Economics and Statistics
Tel: 902-424-2410Email: thomas.storring@novascotia.ca

August 01, 2019
BANK OF ENGLAND MONETARY POLICY

The Bank of England's Monetary Policy Committee (MPC) voted to maintain the Bank Rate at 0.75 per cent. The MPC also voted to maintain the stock of UK non-financial corporate bonds stock at £10 billion and the stock of UK government bond purchases at £435 billion.  The MPC notes that the appropriate path of monetary policy will depend on the balance of the effects of Brexit on demand, supply and the exchange rate. The monetary policy response will not be automatic and could be in either direction, but will be set to achieve 2% inflation target. If a smooth Brexit and global growth recovery were to occur, the United Kingdom economy would have significant excess demand build over the medium term and the MPC judges that gradual increase in interest rates would be warranted to return inflation to target.

In recent months, global trade tensions have intensified and global activity has been soft. Advanced economies have seen forward interest rates decline and looser financial conditions. The MPC notes that the perceived likelihood of a no-deal Brexit has increased and led to further declines in UK interest rates and a depreciation in sterling exchange rate. Stock building ahead of previous Brexit deadlines has led to volatile data with GDP growth of 0.5% in Q1 2019 and expectations of zero growth in Q2. The UK economy has slowed since 2018 to a rate below potential due to Brexit uncertainty and weaker global trade. The labour market remains tight.

The Committee’s projection are based on smooth adjustment to an average of range of possible outcomes regarding the UK and European Union final trading relationship. In the near term, greater Brexit uncertainties will subdue GDP growth, but GDP will later grow at robust rates with a recovery in global growth and domestic demand.  The median GDP growth projection are for 1.3 per cent in 2019, 1.3 per cent in 2020 and 2.3 per cent in 2021, lower than the previous forecast in the near term.

 Inflation, currently near 2 per cent, is expected to fall below 2 per cent target in the near term due to weaker energy prices and core inflation, currently at 1.8 per cent, is expected to remain close to the rate for remainder of year. Past depreciation of sterling has largely been reflected in current prices, but the outlook for inflation will continue to be sensitive to exchange rate movements and thus Brexit developments. Conditional on a smooth Brexit transition, the acceleration in GDP towards end of forecast period will result in build-up of excess demand (1.75% of potential GDP) and result in inflation rates rising to above target.

 

Bank of England



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