At its meeting on 2 August, the Bank of England’s Monetary Policy Committee voted unanimously to increase Bank Rate by 25 basis points to 0.75%. That was the first move since last November. The tone of the accompanying Inflation Report was hawkish, with inflation overshooting its target, and with growth running at around 1¾% per annum throughout the three-year forecast horizon.
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In putting together its projections, the MPC made two key assumptions: that there would be a smooth adjustment following the UK’s exit from the EU next March; and that the household saving rate would remain close to its all-time low.
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Both assumptions are highly questionable: a smooth adjustment after Brexit is an unlikely outcome, although the MPC probably cannot say that; and the household saving rate is likely to increase, given current economic uncertainty, and pressures on lenders from the Bank of England to reduce the supply of credit.
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We see the UK economy expanding by around 1% this year, and by around ½% next year, with inflation correspondingly weaker than the MPC forecast, and with Bank Rate on hold for the foreseeable future. Within 24 hours of the MPC’s announcement, sterling was almost a cent lower against the US dollar. It appears that, like us, investors are far from convinced by the MPC’s rosy assessment of the UK economic outlook.
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