Last month, the MPC voted to raise the base rate by 0.25% to 0.5% – the first increase in a decade.
At its most recent meeting, which ended on 13 December, MPC said it is still too early to arrive at a comprehensive view of the impact of the recent bank rate rise, though noted that the impact of interest rates faced by households and firms has been consistent with previous experience.
However, the MPC stressed that “any future increases in bank rate are expected to be at a gradual pace and to a limited extent”.
Currently, inflation sits at 3.1% – above the Bank of England’s 2% target.
“The MPC announcement that bank rate was being held at 0.50% was as expected,” said Frances Haque, chief economist at Santander UK.
“Financial markets and economic commentators had not been expecting the MPC to increase rates again when it met,” he continued, “this was partly based on the ‘gently rising path’ approach, which governor Carney discussed in November’s press conference.”
The MPC’s latest economic projections, set out in the November Inflation Report, predicted GDP to grow “modestly” over the three-year forecast period, at a pace just above its “reduced rate of potential”.
While global growth has remained strong, activity indicators suggest that GDP growth in Q4 might be “slightly softer than in Q3”.
Indeed, the Office for Budget Responsibility (OBR) has forecast GDP growth to fall from 1.5% in 2017, to 1.4% in 2018, 1.3% in both 2019 and 2020, before picking back up to 1.5% in 2021 and 1.6% in 2022.
However, despite Brexit uncertainties, business investment was projected to grow at a “modest” pace, supported by strong global demand, high profitability, low cost of capital and limited spare capacity.
Net trade was also bolstered in the projections, owing to strong global expansion and the past depreciation of sterling,
“Productivity tops the list of concerns for the Treasury and MPC alike,” said Nancy Curtin, chief investment officer at Close Brothers Asset Management.
She added: “The Chancellor’s promise to bridge the productivity gap will go some way to improving supply side issues, but it will not bring the scale of improvement we need.”
The projections forecast consumption growth to remain sluggish, in line with household incomes.
Unemployment was expected to remain low throughout the forecast period, and surveys suggest the labour market will remain tight.
Domestic inflationary pressures were projected to pick up gradually as remaining spare capacity was absorbed and wage growth recovered.
The MPC projected inflation to decline from around 3% to approach the 2% target by the end of the forecast period, reflecting the diminishing effect of sterling’s depreciation.
“Employment may still be near a record high, but wage growth continues to lag inflation, which will limit consumer spending,” said Curtin.
In addition to the sluggish consumption and modest macroeconomic outlook are Brexit induced uncertainties, said the MPC.
Though the committee noted progress in the Article 50 negotiations between the UK and the EU, the committee said it was exercising caution in balancing inflation targets with impacts on jobs and activity.
“Development regarding the United Kingdom’s withdrawal from the European Union – and in particular the reaction of households, businesses and asset prices to them – remain the most significant influence on, and sour of uncertainty about, the economic outlook,” read the minutes.
Haque said: “A clear point of interest in the coming months will be when the next hike is likely to come to meet this steady approach, with commentators holding differing views on when this might occur in 2018.”
He added: “However, it is clear that any subsequent rise will depend on how the economic news on inflation and growth develops and the government’s progress with Brexit negotiations.”
The MPC confirmed at its meeting that “were the economy to follow the path expected in the November Inflation Report, further modest increases in bank rate would be warranted over the next few years”.
The next MPC meeting is due in February 2018.