Today's MPC decision: Members surprised by weaker than expected GDP and infaltion - EY ITEM Club

8 May 2014

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  • Rates remain at 0.5% despite unemployment falling below 7%
  • The MPC has been surprised by weaker than expected GDP and inflation
  • Housing boom likely to prompt macro-prudential response rather than a rate rise 

Martin Beck, senior economic adviser to the EY ITEM Club said:

"With unemployment falling below the 7% threshold, MPC members are no longer bound by ‘Phase I’ of forward guidance. Yet today’s decision to keep policy on hold shows that there is still little appetite among committee members to end a period of historically-low interest rates. With the Committee now moving to forward guidance ‘Phase II’ and focusing on a broader range of indicators of spare capacity in the economy, the unemployment rate has less prominence in monetary policy decisions.

“Today’s decision was unsurprising. GDP growth in Q1 came in below the MPC’s expectations, so, in the words of Mark Carney, the economy remains in ‘recovery rather than expansion’ mode. Moreover, inflationary pressures have continued to ease, with CPI inflation in March dropping to 1.6%, the lowest since October 2009, and below the Committee’s forecast. The pound’s continued climb and subdued inflation expectations, also, point to benign prospects for inflation in the near-term. 

“With a number of MPC members recently suggesting that the housing market poses a significant threat to the UK’s financial stability, the current pace of house price inflation is the elephant in the room. The Bank is likely to use its macro-prudential tools, possibly as soon as June’s meeting of the Financial Policy Committee, before deploying the blunt instrument of an interest rate rise. Next week’s Inflation Report should provide more enlightenment, pointing, in our expectation, to rates remaining very low for some time yet.“