BOE Stays the Course as Global Rates Rise

In its statement today, the Bank of England’s Monetary Policy Committee (MPC) announced that the bank’s official rate will remain at 0.5% and its QE target will remain at £375 billion. The MPC noted that the UK economy is improving, but “it remains weak by historical standards and a degree of slack is expected to persist for some time.” The statement expressed some concern about the rise in interest rates around the world and the increased volatility of asset prices since the May meeting of the MPC. Inflation in the UK remains above the MPC’s target:

Twelve-month CPI inflation rose to 2.7% in May and is set to rise further in the near term. Further out, inflation should fall back towards the 2% target as external price pressures fade and a revival in productivity growth curbs domestic cost pressures.

Not mentioned was the impact of a weaker pound on inflation. UK policymakers are probably hoping that a weak currency will boost exports more than it will boost inflation. On July 1, Markit’s press release reported that UK manufacturing is picking up:

The UK manufacturing sector maintained its solid second quarter performance into June, with levels of production and new business rising at the fastest rates since April 2011 and February 2011 respectively. Domestic market conditions improved further, while demand from overseas also strengthened. At 52.5 in June, up from a revised reading of 51.5 in May, the seasonally adjusted Markit/CIPS Purchasing Manager’s Index® (PMI®) posted above the neutral mark of 50.0 for the third month running. Moreover, the rate of improvement signaled by the PMI was the steepest for 25 months. The average reading over the second quarter as a whole (51.4)was the highest since Q2 2011….Incoming new orders rose for the fourth consecutive month in June. Manufacturers reported solid demand from domestic markets and clients based in Europe, China, North America, Scandinavia and the Middle East.

On July 3, Markit’s press release reported that UK services are also improving:

UK service sector growth accelerated to its highest level since March 2011 during June as incoming new business rose at a rate unmatched for six years. The sharp increase in new business led to a marked rise in backlogs of work, and encouraged companies to take on additional staff to the strongest degree since August 2007…. After accounting for seasonal factors, the headline Business Activity Index recorded 56.9 in June, up from May’s 54.9 and the highest reading for 27 months. Growth has now been recorded for six successive survey periods, and has continually improved throughout this sequence.

(The minutes of the MPC’s meeting will be published at 9.30 a.m. on Wednesday, July 17.)