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Highlights
As unanimously expected, the Bank of England left its policy interest rate at 5.75 percent. The impact of the five rate increases has yet to fully work their way through the economy. In addition, the market turmoil is increasing risks of slower growth. The Bank has an inflation target of 2 percent. The July CPI reading was 1.9 percent on the year after 15 months of increases above the 2 percent level.
Yesterday the Bank yesterday took its first steps to curb U.K. money market rates, which had climbed to their highest level since 1998. The subprime turmoil has clouded the economic outlook less than a month after the bank signaled that five rate increases in the past year may not be enough to contain inflation. The Bank of England yesterday offered to provide extra money next week to reduce unusually high overnight interest rates.
The monetary policy committee issued a statement with their decision today. In it they said
The Bank of England's Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 5.75%.
In its August Inflation Report, the Committee's central projection was for inflation to remain close to the 2% target over the forecast period and for output growth to ease, reflecting a slowing in both consumer spending and business investment.
In recent weeks, heightened concerns about a variety of asset-backed securities have led to disruption around the world, not only in markets for those financial instruments but also in money markets more generally. The MPC's mandate is to set interest rates to meet the Government's 2% target for CPI inflation. So the Committee discussed these developments and other economic data in terms of their implications for the outlook for inflation.
CPI inflation fell back to 1.9% in July and may remain around, or a little below, the 2% target for the next few months. Pay pressures remain muted. There are tentative signs of a slowing in consumer spending. But the recent solid pace of output growth has been sustained and the margin of spare capacity appears limited. Indicators of pricing pressure remain somewhat elevated.
It is too soon to tell how far the disruption in financial markets will impair the availability of credit to companies and households. As stated in its August Report, the MPC is monitoring closely the evolution of both credit spreads and the quantities of credit extended, alongside all other data relevant to the outlook for inflation.
Against that background, the Committee judged that no change in Bank Rate was necessary at this meeting to keep inflation on track to meet the target in the medium term.
The minutes of the meeting will be published at 9.30am on Wednesday 19 September.
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