BOE MPC Hikes Bank Rate; Gloomy On UK Potential Growth>

-BOE MPC Votes 7-2 To Hike Bank Rate To 0.5%; Ramsden, Cunliffe Dissent        

     By David Robinson and Jamie Satchi                                  

     LONDON (MNI) - The Bank of England Monetary Policy Committee split 

over its decision to hike Bank Rate to 0.5% from 0.25%, with deputy 

governors David Ramsden and Jon Cunliffe dissenting and backing no 

change.

     The MPC offered no guidance on whether it believed another hike was 

likely to be needed near-term and nor did it comment on market rate 

expectations that Bank Rate would rise very gently to just 1.0% in three 

years' time. 

     The mix of an as expected seven-to-two vote split and the absence 

of commentary from the MPC on future rate increases make the combined 

policy announcement and accompanying minutes at the dovish end of market 

expectations. 

     The November Inflation Report forecasts assumed average four 

quarter weekly earnings growth would rise from 2.25% in Q4 2017 to 3% in 

Q4 2018 and 3.25% in Q4 2019. 

     Dissenters Cunliffe and Ramsden argued that "there was insufficient 

evidence so far that domestic costs, in particular wage growth, would 

pick up in line with the Inflation Report's central projection." 

     For the majority on the MPC "a small reduction in stimulus was ... 

warranted at this meeting to return inflation sustainably to target." 

     Strikingly, the MPC has become very pessimistic about the ability 

of the UK economy to expand without igniting inflationary pressures. The 

MPC's estimate of potential growth is now around 1.5% a year or 0.4% a 

quarter. Declining net migration in the wake of the UK vote to leave the 

European Union and much lower than expected inward investment compared 

to the pre-referendum path are expected to hamper supply growth. 

     "Brexit-related constraints on investment and labour supply appear 

to have been reinforcing the marked slowdown that had been increasingly 

evident in recent years in the rate at which the economy could grow 

without generating inflation pressures," the minutes said. 

     The minutes added that there was nothing monetary policy could do 

to prevent adjustments in the real economy for the UK's new trading 

arrangements. 

     "It had become increasingly evident that the pace at which the 

economy could grow without generating inflationary pressure had fallen 

relative to pre-crisis norms," the minutes said. 

     The central projections in the November Inflation Report showed CPI 

on market rates peaking at 3.2% in October before drifting lower to 

2.37% in Q4 2018, 2.21% in Q4 2019 and 2.15% in Q4 2020. 

     The profile of inflation holding above the 2.0% target throughout 

the three year forecast was similar to that in August with the slightly 

lower outturns largely reflecting the rise in market rate expectations. 

     The full impact of sterling's depreciation was seen feeding through 

at the start of the forecast with rising domestic price pressures 

keeping inflation above target in the latter stages of the forecast. 

     The projections were conditioned on Bank Rate rising to 0.7% in Q3 

2018 and on up to 0.9% by Q4 2019 and 1.0% by Q3 2020. 

     Four quarter GDP growth for Q4 2017 was raised to 1.5% from 1.3% in 

August but lowered to 1.7% in Q4 2018 from 1.8% and left unchanged at 

1.7% for Q4 2019. 

     -London newsroom: e-mail: david.robinson@marketnews.com    

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