 
 
Monetary policy summary, August 2015 
 
The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy in order to meet the 2% inflation 
target and in a way that helps to sustain growth and employment.  At its meeting ending on 5 August 2015, the 
MPC voted by a majority of 8-1 to maintain Bank Rate at 0.5%.  The Committee voted unanimously to maintain 
the stock of purchased assets financed by the issuance of central bank reserves at £375 billion, and so to 
reinvest the £16.9 billion of cash flows associated with the redemption of the September 2015 gilt held in the 
Asset Purchase Facility. 
 
CPI inflation fell back to zero in June.  As set out in the Governor’s open letter to the Chancellor, around three 
quarters of the deviation of inflation from the 2% target, or 1½ percentage points, reflects unusually low 
contributions from energy, food, and other imported goods prices.  The remaining quarter of the deviation of 
inflation from target, or ½ a percentage point, reflects the past weakness of domestic cost growth, and unit 
labour costs in particular.  The combined weakness in domestic costs and imported goods prices is evident in 
subdued core inflation, which on most measures is currently around 1%. 
 
With some underutilised resources remaining in the economy and with inflation below the target, the Committee 
intends to set monetary policy in order to ensure that growth is sufficient to absorb the remaining economic 
slack so as to return inflation to the target within two years.  Conditional upon Bank Rate following the gently 
rising path implied by market yields, the Committee judges that this is likely to be achieved.   
 
In its latest economic projections, the Committee projects UK-weighted world demand to expand at a moderate 
pace.  Growth in advanced economies is expected to be a touch faster, and growth in emerging economies a 
little slower, than in the past few years.  The support to UK exports from steady global demand growth is 
expected to be counterbalanced, however, by the effect of the past appreciation of sterling.   Risks to global 
growth are judged to be skewed moderately to the downside reflecting, for example, risks to activity in the euro 
area and China. 
 
Private domestic demand growth in the United Kingdom is expected to remain robust.  Household spending has 
been supported by the boost to real incomes from lower food and energy pric es.  Wage growth has picked up 
as the labour market has tightened and productivity has strengthened.  Business and consumer confidence 
remain high, while credit conditions have continued to improve, with historically low mortgage rates providing 
support to activity in the housing market.  Business investment has made a substantial contribution to growth in 
recent years.  Firms have invested to expand capacity, supported by accommodative financial conditions.  
Despite weakening slightly, surveys suggest continued robust investment growth ahead.  This will support the 
continuing increase of underlying productivity growth towards past average rates. 
 
Robust private domestic demand is expected to produce sufficient momentum to eliminate the margin of spare 
capacity over the next year or so, despite the continuing fiscal consolidation and modest global growth.   This is 
judged likely to generate the rise in domestic costs expected to be necessary to return inflation to the target in 
the medium term.  
 
 
 
The near-term outlook for inflation is muted.  The falls in energy prices of the past few months will continue to 
bear down on inflation at least until the middle of next year.  Nonetheless, a range of measures suggest that 
medium-term inflation expectations remain well anchored.  There is little evidence in wage settlements or 
spending patterns of any deflationary mindset among businesses and households.  
 
Sterling has appreciated by 3½% since May and 20% since its trough in March 2013.  The drag on import prices 
from this appreciation will continue to push down on inflation for some time to come, posing a downside risk to 
its path in the near term.  Set against that, the degree of slack in the economy has diminished substantially over 
the past two and a half years.  The unemployment rate has fallen by more than 2 percentage points since the 
middle of 2013, and the ratio of job vacancies to unemployment has returned from well below to around its pre-
crisis average.  The margin of spare capacity is currently judged to be around ½% of GDP, with a range of 
views among MPC members around that central estimate.  A further modest tightening of the labour market is 
expected, supporting a continued firming in the growth of wages and unit labour costs over the next three years, 
counterbalancing the drag on inflation from sterling. 
 
Were Bank Rate to follow the gently rising path implied by market yields, the Committee judges that demand 
growth would be sufficient to return inflation to the target within two years.  In its projections, inflation then 
moves slightly above the target in the third year of the forecast period as sustained growth leads to a degree of 
excess demand.   
 
Underlying those projections are significant judgements in a number of areas, as described in the August 
Inflation Report.  In any one of these areas, developments might easily turn out differently than assumed with 
implications for the outlook for growth and inflation, and therefore for the appropriate stance of monetary policy.  
Reflecting that, there is a spread of views among MPC members about the balance of risks to inflation relative 
to the best collective judgement presented in the August Report.  At the Committee’s meeting ending on 
5 August, the majority of MPC members judged it appropriate to leave the stance of monetary policy unchanged 
at present.  Ian McCafferty preferred to increase Bank Rate by 25 basis points, given his view that demand 
growth and wage pressures were likely to be greater, and the margin of spare capacity smaller, th an embodied 
in the Committee’s collective August projections. 
 
All members agree that, given the likely persistence of the headwinds weighing on the economy, when Bank 
Rate does begin to rise, it is expected to do so more gradually and to a lower level than in recent cycles.  This 
guidance is an expectation, not a promise.  The actual path Bank Rate will follow over the next few years will 
depend on the economic circumstances.  The Committee will continue to monitor closely the incoming data. 
 
 
 
 
Bank of England  Minutes of the Monetary Policy Committee Meeting ending on 5 August 2015 1 
 
Minutes of the Monetary Policy Committee meeting ending on 5 August 2015
 
1 Before turning to its immediate policy decision, and against the backdrop of its latest projections for output 
and inflation, the Committee discussed financial market developments;  the international economy;  money, 
credit demand and output;  and supply costs and prices. 
 
Financial markets 
2 There had been a range of influences on international financial markets over the month, including:  
reactions to news on the progress of negotiations between the Greek government and its creditors;  falls i n 
global commodity prices;  and large moves in Chinese equity prices.  There had been some associated volatility 
in UK equity markets within the month. 
3 Another significant influence on financial markets had been a renewed focus on the timing and extent of 
possible monetary policy tightening in both the United Kingdom and the United States  in reaction to data 
outturns and communications by MPC and FOMC members.  In the light of these developments, the Committee 
discussed what financial market prices implied now for expectations of the future path of monetary policy in 
these countries, and whether this was connected with recent moves in exchange rates. 
4 In the United Kingdom, there had been a slight steepening in the market implied path of short-term interest 
rates and the date at which the OIS curve crossed 0.75% had moved forward to May 2016.  This was around 
three months earlier than had been the case at the time of the July MPC meeting, although only one month 
sooner than at the time of the May Inflation Report.  In addition, the implied pace of tightening had quickened 
slightly, with forward OIS rates rising thereafter by around 10 basis points per quarter to reach 1.7% at the 
three-year horizon.  These moves appeared consistent with an improvement in sentiment  as market participants 
put less weight on the downside tail risks associated with the Greek debt crisis, as well as market reactions to 
domestic data outturns and statements by MPC members about future increases in Bank Rate. 
5 In the United States, there had been a small rise in short-term interest rates and there remained a broad 
consensus in financial markets that monetary policy tightening would begin earlier there than in the United 
Kingdom, with the first rate rise expected by market commentators in either September or December 2015.  
Rates were expected thereafter to rise at a faster pace and to a slightly higher level than in the United Kingdom.  
The difference in the future path of policy rates in the two countries expected by financial market participants 
might be because of a perception that the headwinds to demand would ease more rapidly in the United States 
than in the United Kingdom, which was in the process of a more significant fiscal consolidation, had stronger 
trade and financial linkages to the euro area, and where levels of household indebtedness were higher.   
6  The sterling effective exchange rate had not changed materially over the month, but remained well above 
the range within which it had traded since its depreciation in 2008, having risen by 3½% since the fifteen-day 
average starting point upon which the May Inflation Report had been conditioned, and by 20% since its trough in 
2013.  The movements in sterling over the course of 2015 had been correlated with changes in the interest rate 