Since February 2019, the Bank of England base rate of interest is 0.75%. The change was made public through the Bank of England’s Monetary Policy Committee announcement, but what does this mean for the UK economy? Most importantly, what do changes in interest mean for traders?
The Bank of England Monetary Policy Committee (MPC) meeting
The Bank of England Monetary Policy Committee meeting is held regularly in order to set the UK’s 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 which meets the government’s inflation target. The target currently is at 2%.
Before the MPC announcement, meetings are held over three days in the week. The MPC meetings are held eight times throughout the year. It starts with a briefing from the Bank of England staff, and then during the meetings, the economic data is discussed as well as what policies need implementing. On the third day the committee votes and then 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 20th of June 2019. The minutes from the meeting are released on the same day.
2019 MPC Dates
|Date of MPC Announcement||Inflation Report Publication|
Why is the MPC meeting important to traders?
The MPC meetings are significant for traders as they set the UK’s interest rates. This essentially determines the way people spend, which affects how much things cost. Therefore the base rate influences both inflation and prices. The base rate also determines how much money commercial banks can borrow from the Bank of England.
The bank will also consider 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.
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 to 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. 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 MPC use to influence the rate of inflation in the country. This is the Bank of England Base Rate (BOEBR) and the asset purchase facility (APF).
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 the 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 is increased. This all impacts the financial markets like the FX rates.
An example of when the base rate was lowered is the global recession which happened in late 2008. The Bank of England responded by lowering the 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 encourages spending and investing.
However, there is a limit to how much rates can be reduced to.
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 forms of bonds, another name for this is asset purchase. 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 out on loans, such as business loans. This is because rates on government bonds normally affect other interest rates in the economy.
Furthermore, if the inflation rate that has been decided goes beyond the government’s target, then the MPC has the power to sell part or even all of its assets as a way of reversing the effect.
The 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 case there is a tie. 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 favours the high-interest rates as a way of stabilising inflation.
Doves: A dove is someone who takes the opposite stance and prefers monetary policies that include low-interest rates.
History of the MPC
The committee was created after 1997’s 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.