Econoday Report: BOE Announcement 11, 2007

2008 Economic Calendar

BOE Announcement

Definition
The Bank of England Monetary Policy Committee consists of nine members. The Committee meets monthly for two days, usually during the first week in the month in order to determine the near-term direction of monetary policy. Changes in monetary policy are announced immediately after the meetings, but no details are available until the minutes are published two weeks later. Why Investors Care

Released on 1/11/07

Change
Actual	25bp
Previous	0 bp

Level
Actual	5.25%

Highlights
In a surprise move, the Bank of England's Monetary Policy Committee increased its key interest rate by 25 basis points to 5.25 percent. The new rate now matches the federal funds target rate. Inflation as measured by the consumer price index has been at or above the Bank's inflation target since July 2005, with a brief pause in March 2006. While a majority of analysts anticipated a first quarter rate increase, few expected one in January. Economic data have been strong. The CPI was up 2.7 percent in November and has been consistently above the Bank's 2 percent inflation target. The retail price index, on which many wage deals are based, is at an eight-year high of 3.9 percent. House price growth is robust and demand for mortgage lending suggests that, in spite of the sharp rise in personal bankruptcies, only a relatively small number of people are unable to cope with their debt. Corporate profitability is high, suggesting business investment growth will continue to be good this year.

Below is the MPC's statement accompanying the increase:

"The Bank of England's Monetary Policy Committee today voted to raise the official Bank Rate paid on commercial bank reserves by 0.25 percentage points to 5.25%.

"In the United Kingdom, output continues to rise at a firm pace. Domestic demand has grown steadily and credit and broad money growth remain rapid. The international economy continues to grow strongly.

"Sterling has risen and oil prices have fallen back. But the margin of spare capacity in the economy appears limited, adding to domestic pricing pressures. CPI inflation was 2.7% in November. It is likely that inflation will rise further above the target in the near term, but then fall back as energy and import price inflation abate. Relative to the November Inflation Report, the risks to inflation now appear more to the upside.

"Against that background, the Committee judged that an increase in Bank Rate of 0.25 percentage points to 5.25% was necessary to bring CPI inflation back to the target in the medium term.

"The minutes of the meeting will be published at 9.30am on Wednesday 24 January."

Trends

The Bank of England's primary goal is to contain inflation and it uses an inflation target to do so. The Monetary Policy Committee has been using the harmonized index of consumer prices for its inflation indicator - the CPI - since January 2004. The Bank's inflation target has been 2 percent since that time. Previously, the MPC used the retail price index excluding mortgage interest payments as its inflation indicator and a 2.5 percent inflation target. There has been a substantial spread between the two measures of inflation which can be traced to the way they are calculated. Among the key differences is the exclusion of council taxes and owner-occupied housing costs from the CPI. Arithmetic means are used to combine individual prices to construct the RPIX while geometric means that allow for substitution are used in calculation of the CPI. This formula differential accounts for nearly half of the difference in the two rates.

Data Source: Haver Analytics

2007 Release Schedule

Released On: 1/11 2/8 3/8 4/5 5/10 6/7 7/5 8/2 9/6 10/4 11/8 12/6

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