Bank of England meeting

The Bank of England’s MPC announcement in December 2017 saw the base rate of interest held at 0.5%, following November's rise. What effect does the base rate have on the UK economy, and what do changes mean for traders?

What is the Bank of England’s MPC meeting?

The Bank of England’s Monetary Policy Committee (MPC) meeting is a regular session held by the MPC, in which it sets the UK’s base interest rate (and other monetary policies). The committee’s aim is to choose an interest rate that will enable the government’s inflation target to be met. This target is currently 2%.

When is the next interest rate announcement?

The MPC meeting runs over three days in the week prior to an announcement. The next MPC announcement will be made on Thursday 21 June 2018, with minutes from the committee’s meeting published on the same day.

See a full calendar of upcoming MPC dates.

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How does the Bank of England meeting affect traders?

MPC meetings are important dates in CFD traders’ calendars as they set the official interest rate in the UK. 

This UK interest rate is the rate at which the Bank will lend money to commercial banks. However it also influences the rates set by commercial banks and other lenders, causing ripple effects across the UK economy. These include changes in demand for bonds, stocks, currency and other securities, as well as consumer spending and inflation.

The committee also decides whether quantitative easing is required. This is a measure the Bank can use to inject money directly into the economy with the aim of boosting spending.

Traders and investors need to pay close attention to MPC meetings and adapt their investment strategies and portfolios in response to any policy decisions.

Why is the interest rate important to traders?

Traders search for any indication of what the UK interest rate and monetary policies will be in the future. If they are able to get their predictions right, they can change their strategy ahead of the announcement and maximise their profits. An interest rate hike, for example, is likely to increase the value of the pound but reduce the value of stocks, bonds, indices (eg FTSE 100) and other securities. Lowering interest rates or implementing quantitative easing, on the other hand, is likely to have the opposite effect.

Traders look at the composition of the MPC and make predictions about the policies each member will vote for, as well as broader economic factors such as Brexit which could influence the committee (see What are hawks and doves?)

Markets to watch

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In what way does the MPC influence inflation?

The MPC is responsible for setting monetary policy, with the aim of meeting the government’s inflation targets. The MPC has two policy tools which it can use to influence the rate of inflation. These are the BOEBR and asset purchase facility (APF), both of which allow the Bank to influence the supply of money across the economy.

Setting the UK interest rate

The Bank of England Base Rate (BOEBR), also known as the official bank rate, is the rate of interest charged by the BoE to commercial banks for overnight loans. It is the base rate of interest for the UK economy and has a strong impact on the short and long term interest rates charged by commercial banks.

When the base rate is lowered, banks are encouraged to borrow more money from the BoE and lower their own interest rates. This reduces the cost of borrowing for businesses and consumers, enabling them to borrow and spend more. Conversely, if the base rate rises, borrowing money from the BoE is discouraged, leading banks to increase their own interest rates. This increases the cost of capital for businesses and consumers, making borrowing more expensive and incentivising saving.

These effects ripple across the global economy, affecting the financial markets, FX rates, and eventually economic factors like unemployment and inflation.

Quantitative easing

Quantitative easing (QE) is the process by which a bank creates new money electronically and uses it to purchase assets. The BoE’s QE programme is called the asset purchase facility (APF) and has mainly been used to buy government bonds from private sector businesses, plus a limited number of high quality commercial bonds. 

This injection of cash into the economy increases the demand for the purchased assets, causing their prices to rise and their yields to fall. Those selling the bonds will therefore look to invest the proceeds elsewhere to maximise their return, resulting in a money multiplier effect. The result of this cash injection is therefore wide-ranging, affecting spending and the liquidity of assets across the economy and reducing the cost of borrowing for businesses and consumers.

If inflation rates increase beyond the government’s target, the MPC has the ability to sell a portion or all of its assets to reverse the effect.

Bank of England meeting dates

The MPC meets eight times a year, following a briefing by Bank of England staff, with each meeting lasting a total of three days. The meetings involve a discussion of the latest economic data from the Bank of England and what policies should be implemented to help the MPC achieve its aims.

The committee votes on the third day, with the interest rate decision published the following Thursday at 12pm (UK time). The committee also publishes an inflation report after every other meeting.

2018 MPC dates*

Date of MPC announcement

Inflation report publication

8 February

Yes

22 March

No

10 May Yes
21 June No
2 August Yes
13 September No
8 November Yes
20 December No

*2018 dates are provisional

Who are the key people on the MPC?

The MPC is made up of five members of the Bank of England – the governor, three deputy governors and the chief economist – and four economic experts appointed by the chancellor of the exchequer.

Each member has one vote with the governor voting last; this makes their vote decisive in case of a tie. All members serve fixed terms (three years for HM Treasury appointees) before being replaced or reappointed.

2018 committee members

Name

Title

Monetary outlook1

Mark Carney

Governor of the Bank of England

Hawk

Ben Broadbent

Deputy governor for monetary policy

Centrist

Sir David Ramsden

Deputy governor for markets and banking

Centrist

Jon Cunliffe

Deputy governor for financial stability

Centrist

Andy Haldane

Executive director, monetary analysis and chief economist

Hawk

Ian McCafferty

External member

Hawk

Michael Saunders

External member

Hawk

Gertjan Vlieghe

External member

Hawk

Silvana Tenreyro

External member

Dove

What are hawks and doves?

Market analysts categorise members of the MPC into two broad categories – hawks and doves – with the aim of predicting whether the committee will vote to change its policies.

Hawks are members who believe that interest rates should be high in order to reduce inflation (at the cost of economic growth), whereas doves believe that interest rates should be low to fuel employment (at the risk of rising inflation). 

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1 The views of each member are not fixed and are likely to vary over time as a result of changes in the economy and the government’s inflation rate targets. This table illustrates where MPC members are thought to stand at the time writing (18 October 2017).

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