Minutes of Monetary Policy committee meeting (2003-11-05)
mpc:
MINUTES OF THE MONETARY POLICY COMMITTEE MEETING HELD ON 5-6 NOVEMBER 2003
1
Before turning to its immediate policy decision, and against the background of its latest
projections for output and inflation, the Committee discussed the financial markets; the world
economy; money, credit, demand and output; the labour market, costs and prices; and some other
considerations.
mpc: 2
Short-term interest rates had risen during the past month in the major industrial economies, but
by more in the United Kingdom than in the United States or the euro area. The release of the minutes
of the Committee's October meeting had led to widespread market expectations of an increase in the
Bank's repo rate. By contrast, market participants did not expect the Federal Open Markets
Committee to raise US interest rates until well into 2004.
mpc: 3
Despite the rise in short rates, forward rates in the United Kingdom had fallen at long maturities.
This might have reflected short-term positioning by market participants, taking views on the future
shape of the yield curve, against the background of continuing demand for longer gilts to hedge the
liabilities of life assurance companies and pension funds. A small short-term movement in long
forward rates was of no particular significance for monetary policy. But the broad stability of long-
term rates was encouraging evidence for the continuing credibility of monetary policy.
mpc: 4
The effective exchange rate index for sterling had risen by over 3% since the Committee's
October meeting. This movement was broadly consistent with changes in short-term interest
differentials over the same period. Given that the recent rise in sterling reflected expectations of a rise
in the Bank's repo rate, a repo rate increase should not result in further appreciation.
mpc: 5
Equity markets had moved little in the past month, which implied that the upward influence from
economic news and the downward influence from higher interest rates had been broadly offsetting.
The major equity indices for the United States, the United Kingdom and the euro area had risen
significantly from the levels embodied in the August
Inflation Report.
The world economy
mpc: 6
The continuing weakness evident in data releases from the euro area suggested that near-term
prospects for external demand for UK goods and services were slightly weaker than at the time of the
August
Inflation Report, even though news from other areas had been positive, particularly in the latest
month. The changes in the Committee's projections for the world economy since August had only a
modest negative impact on the projections for UK inflation.
mpc: 7
GDP had increased by 1.7% in the United States in the third quarter, which was the fastest rate
for nearly twenty years. Consumption and investment had both grown robustly. Net trade had also
made a positive contribution, but the weakness of imports looked anomalous, even though US
competitiveness would have been helped by the depreciation of the dollar over the previous year. The
composition of growth supported the view that the recovery would be durable. The performance of
investment was particularly important in this respect: the pickup in Q3 had been broadly based, with
investment rising in both the information, communications and technology (ICT) and producer
durables (excluding ICT) sectors. The Institute for Supply Management's manufacturing index had
reached its highest level since January 2000, and industrial production had risen by 0.4% in
September. The financial environment for investment was supportive: third-quarter corporate
earnings had been stronger than expected, and equity values had risen, so that a large increase in
borrowing from banks had not been necessary. There were some signs that large corporations were
recovering their confidence to undertake merger and acquisition activity. By contrast, some of the
strength of US consumption might prove to be temporary. Consumption had probably been stimulated
in the short term by tax rebates paid in July and August, and the profile of retail sales suggested that
the pace had eased towards the end of the quarter. Moreover, the rise in longer-term interest rates
since May meant that less support could be expected from mortgage refinancing. And household
gearing was high, so that consumers might be vulnerable to adverse shocks. However, other factors
should be supportive for consumption. The elements of the tax package due to take effect in 2004
were much larger than those which had already been implemented, although consumers might already
have anticipated them to some extent. Household confidence might be bolstered by signs of
improvement in the labour market, although this would probably require further evidence of an upturn
in employment prospects. And monetary policy remained highly accommodative.
mpc: 8
In the euro area, new data in the latest month had been limited. There remained a disjunction
between disappointing economic data and more encouraging business surveys. Euro-area industrial
production had fallen in August; if it were to remain at that level in September, the rise in the third
quarter as a whole would be insufficient to offset the fall in Q2. But business survey data pointed to a
resumption in growth: the Purchasing Managers' Indices (PMIs) for manufacturing and services had
both increased in October; the European Commission measure of euro-area industrial confidence had
also increased slightly, reflecting improved orders and recent production; and the German IFO index
had increased for the sixth consecutive month in October. Stronger surveys did not invariably precede
improved economic performance, and the relationship between the IFO index and German output had
recently been less close. But taken together, the business surveys suggested an upside risk to euro-area
output in the near term relative to the Committee's projections. The latest euro-area consumer
confidence survey showed no change and remained below its long-run average.
mpc: 9
Economic prospects for the euro area over the next two years were uncertain. There were some
positive factors. Real interest rates were low, though to a lesser extent than in the United States.
Domestic demand in the euro area had been over 1% higher in 2003 Q2 than a year earlier. Household
debt was less burdensome in several euro-area countries than in the United States or the United
Kingdom, which could facilitate stronger future consumption growth. The firmer economic prospects
in the rest of the world would support external demand. But there were also some possible adverse
influences. Corporate gearing levels might further restrain investment growth. The rise in the euro
over the past year would probably weaken the contribution to be expected from net trade. The largest
three economies Germany, France and Italy were all relatively weak at present, and the weakness
of Germany might be particularly important for its trading partners. And from a longer-term
perspective, it was possible that the Committee's expectations for the sustainable rate of output growth
in the euro area were too high. With low population growth, output and demand growth might average
only 2% per annum, or possibly less, if productivity growth in recent years represented the underlying
trend.
mpc: 10 There had been little economic news from Japan in the latest month. It remained difficult to
reconcile the strong expenditure-based and weaker output-based measures of growth. Industrial
production was reported to have increased by 3% in September, but this was a volatile series. Output
growth had increased across most of non-Japan Asia; in China, the annual rate of GDP growth was
close to 9%. It now appeared that the impact of SARS on the region had been temporary, mainly
affecting 2003 Q2. Exports from the region were picking up. But the performance of some of the
newly industrialised Asian countries, notably Korea, was weaker.
Money, credit, demand and output
mpc: 11 The monetary aggregates, on the deposit side, were supportive of demand growth without
suggesting that a further increase was in prospect. Aggregate M4 deposit growth had been fairly
steady in 2003, at an annual rate of 7% to 8%. Household M4 growth was also steady, at an annual
rate of around 8%; the growth of households' Divisia, a monetary aggregate which gave greater
weight to deposits that were more likely to be used for making transactions, was a little lower than at
the beginning of 2003; and the annual growth rate of notes and coins in circulation had declined in
October.
mpc: 12 The credit aggregates suggested greater strength. The annual growth rate of aggregate M4
lending to the non-bank private sector had been over 11% for several months. Total lending, secured
and unsecured, to individuals had increased by 14% in the twelve months to September, and this rate
had picked up during the year.
mpc: 13 Several indicators suggested that the housing market had strengthened in recent months. On
activity, net reservations of new houses and loan approvals had both increased, suggesting that
completed transactions were likely to pick up. The average time taken to sell a property had fallen
over the past two mo nths. On house price inflation, an average of the Halifax and Nationwide indices
in the three months to October showed a rise of 3.7%, and, according to the Royal Institution of
Chartered Surveyors, the balance of estate agents reporting price increases in the previous three
months had risen sharply in September. This generally buoyant picture was supported by evidence
from the Bank's regional Agents.
mpc: 14 It remained difficult to explain the continuing rise in the ratio of house prices to earnings, and
hence to assess prospects for the housing market. The Committee had previously considered three
hypotheses: that the equilibrium ratio had increased further in the past year, reflecting in part the
balance of demand and supply; that the recent rise in prices might have been driven by speculative
behaviour or over-optimistic views about the sustainable level of house prices, in which case a
correction would be expected at some stage; and that the lenders' house price indices might be
exaggerating the underlying rate of increase. As before, it remained extremely difficult to distinguish
between these hypotheses.
mpc: 15 Most of the news on UK output and demand during the past month had been positive. GDP in
Q3 was estimated to have grown by 0.6% over the previous quarter, in line with the Committee's
expectations, although the weak industrial production data for September might imply a small
downward revision. Recent business surveys had all strengthened. For example, the Chartered
Institute of Purchasing and Supply (CIPS) services activity balance had risen in October to its highest
level since November 1999. The CBI and BCC measures of manufacturing confidence also suggested
a pickup, while the CIPS manufacturing output index had reached its highest level for seven years.
And the CIPS report on construction was consistent with robust growth in the second half of the year.
Overall, the evidence from the various surveys of business activity suggested that quarterly GDP
growth could exceed its trend rate in 2003 Q4.
mpc: 16 On the expenditure side, the revisions to the National Accounts data released at the end of
September had suggested that demand was better balanced than previously thought. The level of
business investment was estimated to have been higher, and the outlook was more encouraging. The
most recent indicators suggested that consumer spending had not decelerated by as much as the
Committee had previously expected. Retail sales had grown by 1.2% in the third quarter, and the
quarterly growth rate had averaged 0.9% since the first half of 2002. The CBI Distributive Trades
survey for October had pointed to continuing buoyancy into 2003 Q4. However, the persistent
strength of house price inflation seemed to be having less upward impact on consumption than would
have been expected on the basis of historical experience.
mpc:
The labour market, costs and prices
mpc: 17 Surveys suggested that private sector demand for labour had strengthened. CIPS employment
surveys suggested a rise in private sector employment, with the construction sector particularly robust.
Demand for agency staff had increased further in October. Reports from the Bank's regional Agents
suggested tighter labour conditions in services and an increase in skills shortages. Unemployment
remained flat.
mpc: 18 Pay pressures were little changed. Whole-economy average earnings rose by 3.4% in the three
months to August, remaining within the 3% to 3½% range that had prevailed so far this year. Pay
settlements had increased slightly in September, but survey evidence pointed to little upward pressure
on settlements in the forthcoming year. By contrast, the Bank's Agents reported suggestions that pay
negotiations could be more difficult in 2004 than in the recent past. This might reflect the fact that real
post-tax labour incomes had been falling in recent months, for the first time since 1995.
mpc: 19 RPIX inflation had been 2.8% in the year to September. The recent unexpected strength of
house prices meant that the fall in RPIX inflation envisaged over the next few months, reflecting the
falling contribution of the housing depreciation component, might not be as marked as the Committee
had thought. There had recently been a broadly based rise in global non-oil commodity prices, which
were up by nearly 40% in dollar terms since their low point in 2001. But although this implied a
significant rise in sterling UK input prices, it would not have much direct impact on the projection for
RPIX inflation. However, the Committee noted that if the recent rise in commodity prices reflected
stronger global demand, that could eventually put upward pressure on the world price of finished
goods, which in turn would have a more material effect on UK inflation. By contrast, oil prices had
fallen by around 2% in dollar terms since the Committee's October meeting.
mpc:
Other considerations
mpc: 20 A rise in the official repo rate was widely expected. Out of 43 economists polled by Reuters in
the week before the meeting, 37 expected a 25 basis point increase. A few commentators had
suggested that a rise of 50 basis points was possible. And the short-term yield curve was as steep as at
any time since the Committee's inception in 1997; short sterling contracts implied an expectation that
the official repo rate would exceed 5% in early 2005.
mpc:
The November GDP growth and inflation projections
mpc: 21 The Committee reached its policy decision in the light of the projections to be published in the
Inflation Report on Wednesday 12 November.
mpc: 22 The Committee's central projections continued to imply a benign outlook for the economy. On
the assumption of an official repo rate of 3.75%, the profile for GDP growth was rather stronger than
in the August
Inflation Report, and quarterly GDP was expected to grow marginally above trend
through the forecast period. The profile for annual RPIX inflation was somewhat higher than in the
August
Report, and was projected to edge down in the near term, reflecting the diminishing impact of
housing costs, and then to remain around the target during the rest of the forecast period. Imported and
domestic cost pressures were projected to build gradually into the medium term.
mpc: 23 The Committee noted various risks surrounding these projections. There were uncertainties
relating to the outlook for the world economy; to the outlook for UK household spending, including
the sustainable level of house prices and consumers' own perceptions of the likely rate of increase of
real incomes; and to short-term prospects for earnings. One key judgment related to the interpretation
of the recent revisions to GDP. The estimated level of output for several years past had been revised
upwards, but there had been no revision to RPIX inflation. The judgment embodied in the central
projection was that the level of output and employment consistent with stable inflation had been higher
than previously thought. But it was possible that the faster growth in the past was indicative of a more
rapid rate of underlying productivity growth, which would continue into the future; that might imply
lower future inflationary pressure than in the central projection. An alternative possibility was that the
factors bearing down on inflation in the past, for example the appreciation of sterling, had been more
powerful than previously thought, and that, as these effects disappeared over the forecast period,
inflationary pressures would be higher than in the central projection.
mpc: 24 The Committee judged that, relative to the central projection, the overall risks to growth were
slightly on the downside and those to inflation were broadly balanced.
mpc:
The immediate policy decision
mpc: 25 The balance of news in the latest month had been positive for UK output and inflation. The US
economy had grown strongly in Q3, and the recovery there looked more firmly established, although
above-trend growth could persist for some time before output reached full capacity. The outlook for
the euro area was still uncertain. In the United Kingdom, the latest data for retail sales, household
borrowing and the housing market were all strong, and investment intentions surveys pointed to a
pickup. Equity prices at home and abroad had risen since the August
Inflation Report, although not
materially on the month. The recent rise in sterling would tend to bear down on inflation, but that was
probably associated, to some extent, with market expectations that the official repo rate would be
raised at this meeting, rather than being an independent factor.
mpc: 26 The Committee also noted that, because of higher household debt burdens, there was increased
uncertainty as to the strength of the response of consumption to any given interest rate change. It
would therefore be appropriate to move interest rates cautiously. Nevertheless, it was important that
policy should remain forward-looking, so the present decision should be based on the Committee's
assessment of the prospects for inflation and the associated risks.
mpc: 27 Most members thought that a modest rise in the repo rate was now appropriate. This view was
supported by a number of arguments, to which different members gave different weights. The forecast
suggested that inflation would be above the target and rising at the forecast horizon. This was for
several reasons. First, there was now stronger evidence of recovery in the world economy. The upturn
in US investment was particularly significant, since there had previously been uncertainty as to
whether this would occur before US consumption slowed. Second, the growth in UK domestic
demand now appeared to have been more broadly based and better balanced in the past few years than
the Committee had previously thought, following the September revisions to the National Accounts.
Third, consumption growth and housing activity were not slowing as much as the Committee had
expected, and investment and government expenditure were likely to continue to strengthen. Survey
evidence suggested a pickup in output in services and manufacturing, and the labour market appeared
to be tightening a little. Finally, even after a modest repo rate increase, monetary policy would still be
accommodative.
mpc: 28 Moreover, a consideration of the risks to the outlook suggested that a rise in the repo rate was
appropriate. First, the change to the global outlook had reduced the downside risks to activity, and, to
the extent that the July repo rate reduction had been a precaution against the crystallisation of such
risks, that reduction should now be reversed. Second, if rates were not raised, household borrowing
would be more likely to continue to grow at a rate that would eventually prove unsustainable, and there
would be a greater risk of a sharp downward adjustment to house prices if they became more
overvalued, complicating the operation of monetary policy.
mpc: 29 The Committee reviewed the arguments for leaving interest rates unchanged, to which, again,
different members attached different weights. First, once housing depreciation was excluded, the
current rate of inflation was low and wage pressures were muted. Second, the recent weakness of
manufacturing output suggested that there were downside risks to output as a whole in the near term
and hence to inflation. Third, there remained many uncertainties about the interpretation of the data
which had yet to be resolved. For most members, however, these arguments were not sufficient to
outweigh the arguments for a repo rate rise.
mpc: 30 For one member, the Committee's central projection for inflation was somewhat too high. First,
following the revisions to the National Accounts, the balance of potential supply relative to demand
might be more favourable than in the Committee's central projection. The stronger demand which had
materialised over the past four years might have been directly associated with a stronger supply
performance and therefore implied rather less inflationary pressure than in the central projection.
Second, the projections for growth in the euro area might be too optimistic. There had been few signs
of recovery in reported data; most of the surveys, although higher than in earlier months, were below
their long-term average and so did not suggest that trend growth would be achieved soon; and the
fragility of corporate balance sheets might restrain investment. The most likely outcome was therefore
for a more delayed recovery than in the Committee's central projection. Taken together, these points
could imply a materially lower projection for RPIX inflation at the two-year horizon. Inflation was
likely to be rising at that point, so, on this forecast, a rise in repo rate some time in 2004 was likely to
be warranted to continue meeting the target. But to increase it now was not necessary and would
involve some cost in output.
mpc: 31 The Governor invited members to vote on the proposition that the repo rate should be raised by
25 basis points to 3.75%. Eight members (the Governor, Rachel Lomax, Andrew Large, Kate Barker,
Charles Bean, Richard Lambert, Stephen Nickell and Paul Tucker) voted in favour. One member
(Marian Bell) voted against, preferring to maintain the repo rate at 3.50%.
mpc: 32 The following members of the Committee were present: Mervyn King, Governor Rachel Lomax, Deputy Governor responsible for monetary policy Andrew Large, Deputy Governor responsible for financial stability Kate Barker Charles Bean Marian Bell Richard Lambert Stephen Nickell Paul Tucker Jon Cunliffe was present as the Treasury representative.
mpc:
ANNEX: SUMMARY OF DATA PRESENTED BY BANK STAFF
A1 This Annex summarises the analysis presented by Bank staff to the Monetary Policy Committee
on 31 October 2003, in advance of its meeting on 5-6 November. At the start of the Committee
meeting itself, members were made aware of the information that had subsequently become available,
and that information is included in this Annex.
mpc:
I
The international environment
mpc: A2 According to the advance estimate, US GDP in 2003 Q3 had grown by 1.7% on a quarter earlier,
following a rise of 0.8% in Q2; it had been 3.3% higher in Q3 than a year earlier. Government
spending had risen by 0.3% on a quarter earlier, with defence spending flat. Consumption had grown
by 1.6%, reflecting a rise of 6.1% in spending on durable goods. Private investment had grown by
3.3%; residential investment had increased by 4.8%, and non-residential investment by 2.7%. Stocks
had reduced growth by 0.2 percentage points. Exports had risen, and imports had been flat, with net
trade contributing 0.2 percentage points to GDP growth in Q3.
mpc: A3 US industrial production had risen by 0.4% on a month earlier in September, compared with a
fall of 0.1% in August. The September rise had included an increase of 6.6% in the production of
motor vehicles and parts, and a 1.5% increase in the production of information, communications and
technology (ICT) goods. Total industry capacity utilisation had risen to 74.7% in September, from
74.5% in August. New orders for non-defence capital goods had risen by 3.4% in September,
compared with a month earlier. The Institute for Supply Management (ISM) Purchasing Managers'
Index for the manufacturing sector had increased to 57.0 in October, from 53.7 in September; the ISM
index for the non-manufacturing sector had also increased, to 64.7 in October from 63.3 in September.
mpc: A4 US retail sales values had fallen by 0.2% in September, following a rise of 1.2% in August. The
Conference Board measure of US consumer confidence had risen to 81.1 in October, from 77.0 in
September. The rise in the index had reflected improvements in both the expectations and the present
situation components. The final release of the University of Michigan headline index of consumer
confidence had risen to 89.6 in October, from 87.7 in September.
A5 Annual headline consumer price inflation in the United States had increased to 2.3% in
September, from 2.2% in August. Annual core consumer price inflation (excluding food and energy
prices) had fallen to 1.2%, from 1.3%, and producer price inflation had risen to 3.5% in September,
from 3.4%. Annual core US producer price inflation had fallen, to 0.1% in September from 0.4% in
August.
mpc: A6 According to the second release, euro-area GDP had fallen by 0.1% in 2003 Q2, unchanged from
the previous estimate, and compared with no growth in 2003 Q1. Industrial production in the euro
area had fallen by 0.4% in August compared with a month earlier, following an increase of 1.0% in
July. In Germany, industrial production (excluding construction) had fallen by 2.1% on a month
earlier in August, having risen by 2.9% in July. French industrial production had also fallen, by 0.9%
on a month earlier in August, having been unchanged in July. The euro-area Purchasing Managers'
Index (PMI) for the manufacturing sector had risen to 51.3 in October, from 50.1 in September; and
the services sector PMI had increased to 56.0 in October, from 53.6 in September. The euro-area
unemployment rate (ILO measure) had been 8.8% in September, unchanged from August.
Unemployment rates in Germany and France had also been unchanged in September, at 9.4% and
9.5% respectively.
mpc: A7 The European Commission measure of business confidence had risen to 8 in October, from 9
in September, whereas consumer confidence had been unchanged at 17. The German IFO business
climate index had increased to 94.2 in October, from 92.0 in September. Both the future expectations
and current business components of the index had risen. According to Eurostat, the volume of retail
sales in the euro area had fallen by 0.1% on a month earlier in August, following a rise of 0.3% in July.
German retail sales had fallen by 0.5% on a month earlier, following a 1.3% fall in July. French retail
sales had risen by 0.6% in August, following a 0.1% rise in July. French consumer expenditure on
manufactured goods had increased by 3.4% in September, after falling by 2.9% in August.
mpc: A8 Annual harmonised consumer price inflation (HICP) in the euro area had been 2.1% in
September, unchanged from August. Annual core consumer price inflation (excluding energy, food,
alcohol and tobacco) had risen to 1.8% in September, from 1.7% in August. The Eurostat flash
estimate for euro-area HICP inflation had indicated a rate of 2.1% in the year to October. Annual
producer price inflation in the euro area had fallen to 1.1% in September, from 1.4% in August.
A9 In Japan, industrial production had risen by 3.0% in September, compared with a fall of 0.7% in
August. The index of tertiary activity had risen by 1.0% in August compared with a month earlier, and
the all-activity index had increased by 0.3% in the same period. Export volumes had risen by 5.3% in
the year to September, and import volumes had increased by 10.8% over the same period. Nominal
retail sales had fallen by 2.2% in the year to September, having fallen by 2.1% in the year to August.
In the worker household survey, real living expenditures had fallen by 1.9% in the year to September,
having risen by 2.2% in the year to August. The unemployment rate had remained at 5.1% in
September.
mpc: A10 Since the Committee's previous meeting, the spot price of Brent crude oil had fallen by $0.65
per barrel to $28.56. The Economist dollar non-oil commodity price index had increased by 5.5% over
the same period.
mpc:
II
Financial markets
mpc: A11 Between 8 October and 5 November, the short end of the UK nominal forward rate curve had
steepened, with the implied forward rates now rising out to about four years. Economists polled by
Reuters between 28 and 29 October had attached a mean probability of 65% to a 25 basis point rise in
the Bank's official repo rate at the November meeting, and a mean probability of 30% to no change.
Their mean expectations for rates at the end of 2003 and 2004 had increased, to 3.72% and 4.37%
respectively. The short end of the nominal forward rate curve had also steepened in both the United
States and the euro area. At maturities beyond ten years, nominal forward rates in the United
Kingdom, the United States and the euro area had fallen by up to 25 basis points since the October
MPC meeting. Over the same period, UK real forward rates had increased at maturities up to eight
years, euro-area ten-year real yields had remained largely unchanged, and US ten-year real yields had
fallen by around ten basis points.
mpc: A12 Forward RPI inflation expectations out to ten years, as implied by index-linked and nominal gilt
yields, had risen between 8 October and 5 November. There had been a sharp rise in implied inflation
expectations two and a half years ahead, continuing an upward drift evident since July. Surveys of UK
inflation expectations, however, had been broadly unchanged, with mean expectations for 2003 in line
with recent RPIX outturns, and expectations for 2004 stable at around the inflation target.
International ten-year break-even inflation rates in the United States and the euro area had risen on the
month, consistent with news on the global recovery.
mpc: A13 The sterling effective exchange rate index (ERI) had appreciated by 3.5%, to 101.6, between 8
October and 5 November. Sterling had appreciated against the US dollar and the euro by 1.3% and
5.2% respectively. These movements had been broadly consistent with changes in relative interest rate
differentials. Forecasts in the latest Consensus Economics survey for the euro-sterling and the dollar-
sterling exchange rates had suggested that the sterling ERI was expected to depreciate to a level of
around 98 between the three-month and the two-year horizon.
mpc: A14 The dollar had been broadly unchanged in effective terms. Option-based implied volatilities of
dollar bilateral exchange rates, however, had been well above those of sterling, the dollar-yen implied
volatility having increased sharply following the G7 communiqué in mid-September. Risk reversals
had indicated that markets had perceived a continuing risk of dollar depreciation over the following
three months.
mpc: A15 The FTSE All-Share index had risen by 0.9% between 8 October and 5 November. Over the
same period, the FTSE 250 and the FTSE Small-Cap indices had risen by 0.9% and 2.4% respectively.
Within the All-Share index, the performance of different sectors had been mixed. The Information
Technology sector had risen most, and the Basic Industries sector had fallen furthest. Between
8 October and 5 November, the S&P500 and EuroStoxx indices had risen by 1.7% and 5.2%
respectively. The Topix had risen by 0.8%.
mpc: A16 The main corporate news on the month had been Q3 earnings results. In the United States,
around 85% of S&P500 companies had reported their Q3 earnings, which had risen on the quarter.
This improvement in corporate conditions had been reflected in fewer profit warnings. In the United
Kingdom too, fewer profit warnings had been reported in October than in the same month a year
earlier. This had continued a pattern evident since July. Also consistent with an improvement in
corporate conditions, investment-grade and high-yield corporate bond spreads had fallen on the month,
as had uncertainty around the future levels of the FTSE 100 and S&P 500, as measured by implied
volatilities from option prices.
III Money and credit
mpc: A17 The twelve-month growth rate of notes and coin had fallen to 7.3% in October, compared with
7.9% in September. Annual growth of M4 had risen to 7.4% in September, from 7.2% in August. The
twelve-month growth rate of M4 lending (excluding the effects of securitisations) had fallen to 11.4%
in September, from 11.9% in August. Excluding other financial corporations (OFCs), the annual M4
growth rate had risen slightly, to 8.3% in September from 8.2% in August, and the annual M4 lending
growth rate (excluding the effects of securitisations) had risen to 13.5% in September, from 13.4% in
August.
mpc: A18 The twelve-month growth rate of households' M4 had increased slightly, to 8.2% in September
from 8.1% in August. The twelve-month growth rate of households' M4 borrowing (excluding the
effects of securitisations) had risen to 14.9% in September, from 14.7% in August. Within total net
lending to individuals a measure that included borrowing from a broader set of institutions than just
banks and building societies the annual growth rate of secured lending had increased to 14.1% in
September, from 13.9% in August. The annual growth rate of unsecured lending had fallen, however,
to 13.4% in September, from 13.7% in August.
mpc: A19 The average standard variable mortgage rate (SVR) quoted for existing borrowers had been
unchanged in October at 5.30%. However, the average two-year fixed mortgage rate had risen by 25
basis points, and the average two-year discounted mortgage rate had risen by 4 basis points, in
October. Quoted rates on personal loans in excess of £10,000 had fallen by 2 basis points in October.
mpc: A20 The number of loan approvals for house purchase, after adjusting for the number of working
days in the month, had risen to 131,000 in September, compared with 127,000 in August. The House
Builders Federation monthly survey had shown that the balance of members reporting an increase in
net reservations compared with the corresponding month of the previous year had risen sharply in
September compared with August, after allowing for seasonal factors. The number of particulars
delivered had been unchanged in September, at 105,000.
mpc: A21 The annual rate of growth of private non-financial corporations' (PNFCs') M4 deposits had been
unchanged at 8.8% in September. The twelve-month growth rate of PNFCs' M4 lending (excluding
the effects of securitisations) had fallen to 9.4% in September, from 9.6% in August. PNFCs had
raised a monthly average of £2.4 billion of total external finance in 2003 Q3, compared with an
average of £2.9 billion in the preceding six months.
mpc: A22 The quarterly breakdown of sterling bank lending for 2003 Q3 had shown that the annual rate of
debt repayment by the manufacturing sector had increased; the annual rate of lending to real estate
companies and the construction sector had eased.
mpc: A23 The twelve-month growth rate of other financial corporations' (OFCs') M4 deposits had risen to
4.3% in September, from 3.6% in August. The twelve-month growth rate of OFCs' M4 lending
(excluding the effects of securitisations) had fallen to 4.2% in September, from 6.9% in August.
mpc:
IV Demand and output
mpc: A24 The ONS' preliminary estimate for GDP growth at market prices had been 0.6% in 2003 Q3,
following 0.6% growth in Q2. Annual GDP growth had slowed down slightly, to 1.9% in Q3 from
2.0% in Q2.
mpc: A25 The preliminary estimate for service sector output growth had been 0.7% in 2003 Q3, following
growth of 0.2% in Q2. Within the service sector, output in the distribution, hotels and catering sector
had risen by 0.5%, following 0.8% growth in Q2. The ONS had, for the first time, also published an
estimate for production output in Q3 in the preliminary GDP release, which had shown it unchanged
on the quarter, following 0.2% growth in Q2. Following the preliminary GDP release, the September
Index of Production had shown production output falling by 0.2% in Q3; within this, manufacturing
output had been flat, and energy output had fallen by 1.1%.
mpc: A26 Retail sales were estimated to have risen by 0.6% in September. Estimated retail sales growth
had been revised up in July and August, to 0.1% and 0.5% respectively. Retail sales had grown by
1.2% in 2003 Q3, following growth of 1.5% in Q2. The Confederation of British Industry (CBI)
Distributive Trades survey's retail sales balance had risen sharply, to +35, in October, from +17 in
September. The GfK consumer confidence headline balance in October had been 3 for the third
consecutive month.
A27 The Nationwide and Halifax house price indices had risen by 2.0% and 1.2% respectively in
October. The three-month on three-month growth rates of the Nationwide and Halifax house price
indices had also risen, to 3.5% and 4.0% respectively.
mpc: A28 The Bank's regional Agents had conducted an informal survey of around 135 firms involved in
the residential property sector on house price inflation. Most respondents had reported that house
prices had risen by between 0% and 4% over the previous six months, and had expected this trend to
continue over the following six months. Respondents in London, the South and the South-East had
reported slower increases than those in the other regions over the past six months, but responses
pointed to more uniform increases over the next six months. The level of interest rates had been
perceived to be the principal determinant of house price inflation over the next six months, with
expected future house prices the most important.
mpc: A29 Surveys showed that business confidence had risen since the beginning of the year, with
confidence in both the service and manufacturing sectors above their historical averages. For the
service sector, the British Chambers of Commerce (BCC) survey's balance of business confidence
regarding profitability had risen to +40 in 2003 Q3, from +32 in Q2. The Chartered Institute of
Purchasing and Supply (CIPS) survey's index of business expectations in the services sector had also
risen, to 76.3 in October from 76.1 in September. For the manufacturing sector, the BCC survey's
balance of business confidence regarding profitability had risen to +37 in Q3, from +29 in Q2, and the
CBI Quarterly Industrial Trends survey's business optimism balance had risen to 7 in Q3, from 13
in Q2.
mpc: A30 The CIPS services business activity index had risen to 59.1 in October, from 58.7 in September,
but the incoming new business balance had fallen slightly, to 58.4 from 58.6. The BCC services
survey's domestic order balance had risen to +18 in Q3, from +9 in Q2.
mpc: A31 In manufacturing, the CIPS survey's output index had risen sharply, to 59.0, in October, from
54.9 in September, and the new orders balance had also risen slightly, to 57.0. In 2003 Q3, the CBI
total new orders balance had risen to 16, from 18 in Q2, and the BCC domestic orders balance had
remained broadly unchanged.
V
The labour market
mpc: A32 According to the Labour Force Survey (LFS), employment had fallen by 9,000 in the three
months to August, compared with the previous three months. This had followed a rise of 63,000 in the
three months to July, and a 101,000 rise in the previous non-overlapping quarter. The fall in
employment in the three months to August had largely reflected a 90,000 fall in the number of
employees. Self-employment had increased by 58,000, and the number of unpaid family workers had
risen by 13,000. The working-age employment rate had fallen by 0.2 percentage points, to 74.5%.
mpc: A33 Total weekly hours worked in the June-to-August quarter had risen by 0.5% compared with the
previous non-overlapping quarter. This increase in total hours had reflected a 0.5% increase in
average weekly hours over the same period. Average hours worked had increased for both full-time
and part-time workers.
mpc: A34 The CIPS surveys in October had again suggested that private sector employment was
increasing, and surveys of employment intentions had pointed to a pickup in employment growth.
mpc: A35 LFS unemployment had risen by 5,000 in the three months to August, but the unemployment rate
had remained stable at 5.0%. The claimant count had fallen by 1,900 in September; both inflows into,
and outflows from, the count had risen slightly. Working-age inactivity had risen by 59,000 in the
June to August quarter. The working-age inactivity rate had increased by 0.1 percentage points on the
quarter, to 21.4%.
mpc: A36 Headline (three-month average) whole-economy average earnings had increased by 3.4% in the
year to August, up 0.1 percentage points on the July rate. This had reflected a 0.5 percentage points
rise in headline public sector pay growth, to 5.6%. Headline pay growth in the private sector had been
unchanged at 2.9%. Actual whole economy pay growth had been 3.5% in the year to August, down
0.1 percentage points on the previous month. Bonuses had made a small negative contribution of 0.3
percentage points to earnings growth in August.
mpc: A37 The Bank's twelve-month whole-economy mean measure of pay settlements, weighted to match
the composition of the average earnings index, had remained at 3.1% in the year to September.
VI Prices
mpc: A38 Sterling oil prices had fallen by around 4% since the October MPC meeting but, on average, had
been higher in October than in September.
mpc: A39 Manufacturing input prices had fallen by 1.2% in September, mainly owing to lower oil prices.
The annual inflation rate had as a result fallen to 0.5% in September, from 1.7% in August. The CIPS
manufacturing survey had pointed to a rise in input prices in October, with an input price balance of
52.9.
mpc: A40 Manufacturing output prices excluding duties (PPIY) had risen by 0.1% in September, but the
annual inflation rate had been unchanged at 1.4% in September. Survey data had continued to point to
downward pressure on output prices: the expected output price balance from the CBI Quarterly
Industrial Trends survey had remained negative, at 7, in October.
mpc: A41 Annual RPIX inflation had fallen to 2.8% in September, from 2.9% in August. Within this,
annual goods price inflation had fallen by 0.1 percentage points to 0.5% in September. Annual
services price inflation had fallen by 0.4 percentage points to 3.6%. Annual RPI inflation had also
fallen by 0.1 percentage points in September, to 2.8%. But both annual RPIY inflation and annual
HICP inflation had been unchanged, at 2.7% and 1.4% respectively.
mpc:
VII Reports by the Bank's Agents
mpc: A42 The Bank's regional Agents reported that the recovery in service sector activity had broadened
recently and that some acceleration of output had been expected in the fourth quarter. Turnover of
business services may have grown at its fastest rate since mid-2001. That had partly reflected strong
public sector demand. Growth of turnover of consumer services had also been recovering, supported
by the housing market. Nonetheless, the improvement in business confidence across the service sector
as a whole had been patchy, and only a sluggish recovery had been apparent in telecommunications,
information technology, stockbroking and advertising.
mpc: A43 Producer input prices had been edging up. Utilities costs had risen, and further increases had
been expected next year. Prices of some fresh foods had increased sharply, in part the result of the
warm summer weather which had affected yields. Competitive pressures meant that firms had mostly
been unable to pass on these price increases, so that profit margins had narrowed a little. Prices of
finished manufactured goods had been either flat or falling.
mpc: A44 There had been some tightening in regional labour markets. Employment in the service sector
had been growing strongly, in part the result of an expanding public sector. Manufacturing
employment had begun to stabilise. Some private sector firms had increasingly relied on agency staff
or on overseas recruitment to fill vacancies. Skill shortages had begun to intensify in a number of
regions. There had been increasing evidence of pay disputes. Some contacts had believed that this
indicated that there would be a more difficult pay round in the year ahead. The 7% increase in the
National Minimum Wage in October had significantly affected wage costs in a few sectors such as the
leisure industry, but overall its effects on wage costs had been small.