Monetary Policy Committee meeting, Bank of England. 2nd November 2023
Second consecutive MPC meeting without a rate hike
The Bank of England’s Monetary Policy Committee met on 2nd November and voted to keep Bank Rate unchanged at 5.25%. Although this is the second consecutive MPC meeting in which rates have been left unchanged, the vote was not unanimous. Three out of nine members - Megan Greene, Jonathan Haskel and Catherine Mann - voted for a further 0.25% increase, just as they did on 21st September. The summary of last week’s meeting noted that the first auction of UK gilts had taken place on 2nd October, following the decision at the MPC meeting the previous month to reduce the stock of Government bond purchases held for monetary policy purposes by £100b. over the next twelve months (from £80b the previous 12 months). The total sum of assets held by the Bank of England stood at £751b. on 1st November, which indicates that run-offs and gilt sales have thus far amounted to £144b.
Huw Pill, the BoE’s Chief Economist, gave a downbeat assessment of the future trajectory of UK inflation, suggesting that it will not fall quickly even though demand is slowing. The steady decline from last October’s peak of 11.1% to 6.8% in July does, on the face of it, appear to have come to a halt, with September’s reading only 0.1% lower (6.7%). There are good reasons, however, for expecting that inflation will decline quicker than Mr Pill expects. The latest money figures have appeared and they show that UK M4x declined by over £31b. in September. While the reduction in the Bank of England’s balance sheet is one factor, such a sharp decline in just one month suggests that the monetary overhang from the asset purchase programme of 2020-22 scheme has worked its way out of the economy. Annual comparisons are not particularly helpful on this occasion because September 2022 saw a huge spike in short-term borrowing as speculators tried to “short” sterling in the wake of the Truss/Kwarteng mini-budget, which saw M4x rise by over £72b. However, an annualised three monthly decline of 5.7% is one of the lowest readings since the Bank of England adopted M4x as its preferred measure of broad money in September 2009 while the annual rate of decline, 4.2%, is the lowest in over a century. It is possible that the Bank of England will exacerbate the decline in broad money. The problems of Credit Suisse and America’s Silicon Valley Bank earlier in the year may have faded from the headlines but not from the consciousness of Andrew Hauser, the BoE’s director of markets. He said that the new era of on-line banking had resulted in sudden and unexpected deposit runs which raised questions about the appropriate levels of bank reserves. In other words, banks may have to set aside more cash in order to be “safer”, meaning less would be available for new credit.
The UK economy has thus far escaped recession, but only just. Retail sales have been declining on an annual basis for well over a year, and September’s figures were 1% lower than those of August. House prices have been falling on an annual basis for five consecutive months, with prices 4.7% lower in the year to September, the biggest decrease since August 2009. September saw the number of new mortgage approvals fall to an eight-month low of 43,300. The Bank of England may see inflation fall faster than it expects but only at the cost of a sharp slowdown next year thanks to its excessively contractionary monetary policy in the last 18 months.
Access further details on the latest monetary developments in the UK in our monthly reports and videos at https://mv-pt.org/monthly-monetary-update/ .