Bank of England Interest Rate Meeting | Monetary Policy Committee

Monetary Policy Committee (MPC)

The Bank of England Monetary Policy Committee meeting is held regularly in order to set the UK base rate, as well as other monetary policies. Monetary policy is the action a central bank or government can take to determine how much money is in the economy and also the rate of borrowing.

The overall aim is to select a base rate that allows the economy to grow without fuelling excess speculation. The central bank holds the view that inflation should be maintained at 2%.

Before the MPC announcement, meetings undergo a three-day period. The MPC meetings are held eight times throughout the year. It starts with a briefing from Bank of England staff, and then during the meetings, the economic data are discussed as well as what policies need implementing. On the third day the committee votes and on the following Thursday, the interest rates are published at noon. The committee also creates an inflation report after every other meeting. 

When is the next MPC interest rate announcement?

The next announcement is scheduled to be on Thursday 15^th of December 2022. The minutes from the meeting are released on the same day.

2022 - 2023 MPC Announcement Confirmed Dates

Why is the MPC meeting important to traders?

The MPC meetings are significant for traders as they set the UK’s interest rates and monetary policy. The base rate determines how much money commercial banks can borrow from the Bank of England. It also has an effect on the mortgage market and the savings of the public.

Since the financial crisis of 2008, central banks have also adopted quantitative Easing (QE). QE is a strategy implemented by the Bank of England and involves injecting money into the economy in order to encourage and boost spending. This was used during two further crises- the European debt crisis of 2015, and the pandemic in 2020.

Therefore, the MPC meetings can impact the way traders manage and adapt their investment strategies and portfolio in reaction to the policy decisions. If there was a hike in interest rates this would have various effects such as an increase in the cost of borrowing, an increase in mortgage interest payments, saving rather than spending, and an increase in government debts. The value of the currency is likely to increase as well in relation to the rates of other nations. Lowering the interest rate will have the opposite effect of this.

How does the MPC influence inflation in the UK?

There are two policy tools that the MPC uses to influence the rate of inflation in the country. This is the Bank of England Base Rate (BOEBR) and the asset purchase facility (APF).

What is the Bank of England Base Rate?

The base rate is the official interest rate charged by the Bank of England to commercial banks for overnight loans. The rate also affects the long-term and short-term interest charged by commercial banks. Therefore, it is the base rate for the economy in the UK.

So how does it work? Well, if the Bank of England lowers the base rate, then banks may need to borrow from the Bank of England, and as an effect lower their interest rates. In turn, consumers and businesses will be able to borrow and spend more because the cost of borrowing is now lower.

On the other hand, if the rate has been increased, banks will have to increase their rates as borrowing money from the Bank of England may not be an option. In this case, borrowing becomes more expensive for consumers and businesses as the cost of capital has increased.

The base rate was also used as a tool during the recession in 2008. The Bank of England lowered its base rate to 0.5% in a bid to encourage economic recovery. The lower interest rate meant it was cheaper for both consumers and businesses to borrow money, which in turn encouraged spending and investing. However, there is a limit to how much rates can be reduced. 

Asset Purchase Facility

Quantitative Easing is a way of injecting money into the economy, and this is generally done by electronically creating new money. This is then used to buy government debt in the form of bonds, another name for this is asset purchases. The large-scale purchases of these bonds lower the interest rate on the bond (also known as yields). The purchases of these bonds will push down the interest rate offered on loans, such as business loans. This is because rates on government bonds normally affect other interest rates in the economy. The BoE targets a particular bond in the market to protect it from market forces and this can help the balance sheets of banks or other institutions that are vulnerable to higher borrowing costs.

Members of the MPC

There are five members of the Bank of England who make up the MPC. The governor, three deputy governors, and the chief economist. There are also four economic experts appointed by the chancellor of the exchequer. One vote is allowed for each member and the governor votes last, in the event of a stalemate. The members are replaced or reappointed after they serve a fixed term.

Market analysts tend to make predictions on the result of the meetings based on the members and the economic stance that they take. Analysts classify them as monetary hawks and doves.

Hawks

A hawk is someone who prefers market forces to dictate prices.

Doves

A dove is someone who takes the opposite stance and believes monetary policy should be supportive of the economy and its institutions.

History of the MPC

The committee was created after the 1997 general election to be independent of political interference. The committee was then given the responsibility of setting interest rates by following the Bank of England Act 1998. This form of operational responsibility was granted to the committee by the chancellor of the exchequer at the time, Gordon Brown.