Rising Inflation Can Complicate the BoE’s Policy Options
To combat recession fears following the Brexit vote, the Bank of England (BoE) quickly lowered its benchmark interest rate to a record low of 0.25%. In a sign of how afraid they were, they also unveiled a new stimulus package to help boost growth.
But even before the vote, ECRI held a contrarian view, namely, that “even though Brexit could be a negative shock to the economy, it is unlikely to tip it into recession at this time.” In belated recognition of that accurate analysis, the Monetary Policy Committee has now revised its assessment of the Brexit vote’s impact, stating that “[t]he Committee now expect less of a slowing in [U.K.] GDP growth.” Thus, while the possibility of an additional rate cut this year is still on the table, it appears less likely.
Turning to inflation, please consider the year-over-year (yoy) CPI growth rate, presented in the chart, for additional insights. Following the downturn in the UKFIG, which consistently anticipates cyclical turns in CPI growth, CPI growth entered a cyclical downturn in June 2013, and dipped into negative territory in April 2015. However, CPI growth turned up last October, and was unchanged in August from July’s 20-month high.
The latest update to the UKFIG provides insight into the future trajectory of inflation, with implications for BoE policy decisions as it tries to balance the risk of rising inflation with that of slowing growth.