Minutes of Monetary Policy committee meeting (2004-01-07)
mpc:
MINUTES OF THE MONETARY POLICY COMMITTEE MEETING HELD ON 7-8 JANUARY 2004
1
Before turning to its immediate policy decision, the Committee discussed financial markets; the
world economy; money, credit, demand and output; the labour market, costs and prices; and some
other considerations. The Committee noted a letter from the Chancellor, which confirmed the new
operational target for monetary policy to be a 2% twelve-month increase in the Consumer Price Index.
The new remit and an annex outlining details of the new inflation target are attached to these minutes.
mpc: 2
The most significant development in financial markets had been a further fall in the US dollar,
which had depreciated by around 5% against the euro and sterling since the Committee's December
meeting, bringing its cumulative depreciation to over 20% in effective terms since the beginning of
2002. The dollar had now more than retraced its rise against the euro since the beginning of 1999,
although it had recently not been as weak against the currencies of some other important trading
partners of the United States, such as Japan and Mexico.
mpc: 3
There remained a risk that the dollar might fall further. The depreciation to date in effective
terms was unlikely by itself to be sufficient to return the US current account to a sustainable level. The
financing of this deficit had recently depended heavily on official purchases of dollar assets by
overseas central banks, which could reflect a desire to build up liquid reserve balances as well as to
resist the appreciation of their currencies against the dollar. Such purchases might not continue on the
same scale. And there had been a tendency in the past for swings in the major currencies to overshoot
long-term sustainable values. The Committee would need to assess further the full implications of the
fall in the dollar for the world economy and the prospects for UK external demand in the forthcoming
Inflation Report round.
mpc: 4
Short-term and long-term nominal interest rates had fallen materially in the United Kingdom, the
United States and the euro area. The movements in US and UK short rates apparently reflected
perceptions by market participants that the prospective tightening of monetary policy in both countries
would be slower to materialise than previously believed. This change of view had been associated
with lower-than-expected consumer price inflation in both countries, and in the United States with
public comments by monetary officials that had been interpreted as meaning that interest rates would
remain low for some time to come, even though the statement released by the FOMC at the time of
their December meeting suggested that the risks to inflation had become more balanced.
mpc: 5
The falls in US and UK long-term governme nt bond interest rates appeared to reflect a decline in
real rates rather than in implied inflation rates. These movements did not appear easy to reconcile with
some fundamental economic developments, such as the strength of US productivity and the
prospective increase in the US fiscal deficit.
mpc: 6
Equity prices had risen slightly in most major markets, possibly supported by the decline in long-
term interest rates as well as by strengthening global economic prospects. The emergence of
accounting difficulties at Parmalat had caused a rise in that company's bond yields, but there did not
appear to have been any significant general effect on European corporate bond markets.
mpc: 7
The global economy had on balance strengthened since the November
Inflation Report, although
the news over the past month was more mixed. However, the rise in the euro against the dollar would
adversely affect prospects for euro-area activity. Euro-area demand had a high weight in overall
external demand for UK goods, so this would to some extent counteract the positive impact of stronger
global demand.
mpc: 8
In the United States, the latest estimate for GDP growth in the third quarter was unrevised at
2.0% over the previous quarter, and initial indicators pointed to continued strong growth in Q4.
Prospects for investment looked more solid than those for consumption. Estimates of corporate profits
had been revised upwards, which was consistent with very strong productivity growth; industrial
production, especially production of information and communications technology goods, had risen in
November; and the Institute for Supply Management's manufacturing index had reached its highest
level for twenty years in December. Consumption had grown strongly in November. But consumer
confidence had weakened slightly in December, and although non-farm payrolls had turned upwards
over the past three months, they had been increasing by less than the rise in the labour force. In
addition, estimates of the personal saving ratio had been revised downwards, which suggested an
increased risk of an upward adjustment to saving at some point. There was little sign that inflation
would start to pick up in the near future. The annual growth rates of broad and narrow money had
both weakened in recent months, and the core CPI measure of prices had declined on the month in
November for the first time since 1982. Strong productivity growth, associated with falling unit labour
costs, a low level of capacity utilisation and unemployment around 6% suggested that demand growth
could remain high for some time without placing undue pressure on supply. However, monetary and
fiscal policy were both highly stimulatory, and, together with the fall in the dollar and higher dollar
prices for oil and commodities, were likely to imply upward pressure on inflation at some stage.
mpc: 9
Euro-area output growth in 2003 Q3 had been stronger than expected at the time of the
November
Inflation Report, and prospects for the fourth quarter had also improved. But there were
questions about the sustainability of the pickup. Domestic demand in the third quarter had been at the
same level as in the second, so the rise in output rested entirely on the net trade contribution to growth.
The magnitude of this contribution had been surprising given the strength of the euro over the past two
years. Moreover, on the data currently available, it was difficult to identify the counterpart countries
outside the euro area. The judgment that prospects for growth in 2003 Q4 were improving rested in
large part on survey evidence: the Purchasing Managers' Index (PMI) for manufacturing had risen in
each of the six months up to December, and the PMI for services, although it had eased, remained
buoyant. Only limited official data were so far available on activity in the fourth quarter. Euro-area
industrial production had risen by 1.1% in October, but French consumption of manufactured goods
and German retail sales had both been weak in November. And given the strength of the euro it was
not clear that the strong export performance reported for the third quarter would continue: if export
volume growth had been maintained only by a reduction in exporters' profit margins, it might not be
sustainable. Investment might also weaken if margins had been squeezed. However, if the stronger
euro implied a rise in the terms of trade, and hence higher real wages measured relative to the price of
consumer goods, it might result in higher consumption.
mpc: 10 There continued to be signs of a modest recovery in Japan. The estimate for GDP growth in
2003 Q3 had been revised down from 0.6% to 0.3%, which was more consistent with the profile of the
all-activity index. However, industrial production had increased strongly in October and November.
Demand and output were growing strongly in the main Asian economies, with the exception of South
Korea, and growth in the region did not appear to depend so much on that in the United States.
mpc:
Money, credit, demand and output
mpc: 11 News on the growth of output and aggregate demand in the UK economy had been generally
positive since the Committee's December meeting. The estimate of GDP growth at market prices for
2003 Q3 had been revised upwards, although the level of GDP measured at basic prices was slightly
lower because of revisions to earlier data. Both household and government consumption growth were
now estimated to have been stronger than thought at the time of the November
Inflation Report.
Business investment had been revised downwards, and was still estimated to have fallen in the third
quarter. But the statistical discrepancy between the estimates for output and income and for aggregate
expenditure was unusually large, and it seemed possible that the estimated level of business investment
might eventually be revised up. Early indications were that robust output growth had continued into
the fourth quarter, matching and possibly exceeding the rate of growth of potential output.
Manufacturing production had been stronger than expected in October, and business surveys for both
the services and manufacturing sectors remained strong in November. Prospects for investment were
underpinned by improving corporate profitability and cashflow and easier access to long-term finance
through the bond and equity markets. Aggregate annual M4 growth had increased to 7.0% in
November, although the growth of corporate deposits, which had been particularly strong, might partly
reflect temporary factors.
mpc: 12 The evidence on consumer demand was on balance positive, though the estimated saving ratio
had been revised upwards. The latter suggested that the risk to future consumption arising from a
sharp upward correction to household saving might be less than previously thought. Indicators for
2003 Q4 were more mixed. Retail sales had risen only modestly in November, but there was anecdotal
evidence that while sales growth had also been slow early in December it had picked up close to
Christmas, partly encouraged by price discounting. The GfK measure of consumer confidence had
risen slightly in December, suggesting that the repo rate rise in November had not had an unduly
adverse effect, although it was too early to reach a conclusive assessment.
mpc: 13 Household borrowing remained very strong, although the growth of unsecured credit had eased
slightly in recent months. Past rises in house prices meant that secured borrowing was likely to grow
strongly for some time to come. The housing market appeared to be strengthening. Housing loan
approvals adjusted for the number of working days had risen in November; the November survey by
the Royal Institution of Chartered Surveyors showed a rise in sales and a fall in unsold stocks of
houses; and both the Halifax and Nationwide indices had shown strong house price increases in
December, again providing early evidence that the November repo rate increase had not adversely
affected confidence.
mpc:
The labour market, costs and prices
mpc: 14 There were again signs that the labour market was tightening. The Labour Force Survey (LFS)
measure of the unemployment rate had fallen to 5.0%, and survey indicators and reports from the
Bank's regional Agents suggested that private sector employment was rising. Private sector pay
settlements had been edging up for about a year, and it was likely that larger bonuses, notably in
financial services, would push up overall earnings figures in the coming months. On one measure,
whole-economy unit labour costs had risen by over 3% in the year to 2003 Q3; non-wage labour costs
had been rising particularly fast, accounted for by employers' pension and social contributions. But
current rates of increase in pay were still moderate, particularly when account was taken of the rise in
retail price inflation since mid-2002 and the increase in employees' National Insurance contributions.
The pickup in employment and earnings growth seemed broadly consistent with the
Inflation Report
projections, and did not suggest that the labour market was overheating.
mpc: 15 RPIX inflation had been exactly on target at 2.5% in November. Inflation measured by the new
target measure, the consumer price index (CPI), had fallen to 1.3%, which was a little weaker than
expected and below the new target of 2%. However, prospective increases in utility prices meant that
it was likely to rise closer to the target rate during the first half of 2004.
mpc: 16 Global oil and commodity prices had been rising sharply in recent months in dollar terms. But
this largely reflected the fall in the dollar; for example, the Economist commodity price index had
risen by only 5% in sterling terms in the year to December, as compared with a rise of 17% in dollar
terms. In a period of large movements in relative currency values, it was difficult to choose an
appropriately neutral yardstick. However, it seemed that there was some upward pressure on
commodity prices from the recovery in global activity.
Other considerations
mpc: 17 Most market participants did not expect an increase in the Bank's repo rate. The average
probability attributed by respondents in the monthly Reuters poll to a 0.25 percentage point increase
was 26%.
mpc: 18 The Committee considered the implications of the change in the inflation target, from 2.5% on
the RPIX measure to 2.0% on the CPI measure. On the new definition inflation had been below its
target over the past year, whereas on the old definition it had been slightly above its target for most of
this period. However, given the lags between changes in the repo rate and their impact on output and
inflation, monetary policy needed to be forward looking. The Committee had not yet formally agreed
a central projection for CPI inflation through the comprehensive process of an
Inflation Report round,
but noted that the gap between RPIX and CPI inflation was currently unusually large and was likely to
narrow over the forecast horizon as house price inflation moderated. Some two years ahead, the
difference would probably be around half a percentage point, so the change in target variable
combined with the change in numerical target should not have material implications for the current
stance of policy.
mpc:
The immediate policy decision
mpc: 19 News from the world economy had on balance been positive since the November
Inflation
Report, with the United States showing strong growth and with developments in the euro area being
more encouraging. The balance of news from the United Kingdom had also been positive, with output
growth expected to be at or above trend in the second half of 2003, although the level of output at
basic prices had been revised downwards. Consumption was still growing steadily, and house price
rises were once again above expectations. The labour market was tightening modestly, broadly in line
with the November
Inflation Report projections. Although consumer price inflation was currently well
below its target, it was expected to rise in early 2004, and upward pressure on inflation was expected
to build gradually over the medium term as demand growth put increasing pressure on supply capacity.
The effect of the continuing weakness of the dollar on activity in the euro area and on external demand
for UK output was a key uncertainty. The impact of the November repo rate increase on UK domestic
demand was also not yet clear, but so far it did not seem to have had a significant adverse effect on
consumer confidence, consumer demand or the housing market. The change in the Committee's
inflation target did not by itself warrant a change in the current stance of policy because, at the two-
year horizon, the gap between the two measures of inflation seemed likely broadly to match the change
in the numerical target.
mpc: 20 Against this background, there were some arguments for an immediate rate rise, to which
different members gave different weight. First, the November
Inflation Report central
projection, on
the constant interest rate assumption, was that inflationary pressure would gradually be building over
the next two years. If the economy continued to evolve as had then been envisaged, a gradual rise in
interest rates would be necessary. Second, the news from the global economy since the November
Inflation Report, although mixed, had on balance been positive. Third, domestic demand and output
growth were on balance stronger than envisaged in November.
mpc: 21 Nevertheless most members agreed that it was not necessary to change the repo rate this month.
First, there were few signs that costs and prices in the United Kingdom were currently rising more
rapidly than had been envisaged in the November
Inflation Report. Second, inflation expectations
remained well-anchored. Third, there were material downside risks in the current conjuncture. The
fall in the dollar could put the nascent euro-area recovery at risk, and the euro area was a particularly
significant source of external demand for UK goods. The decline in the dollar had also recently been
associated with a modest rise in the sterling effective rate index, which implied downward pressure on
UK activity and inflation. Fourth, the rise in indebtedness of UK consumers implied increased
uncertainty about the effect of a change in monetary policy on consumption, and for that reason,
changes in interest rates should be gradual. Finally, the success of monetary policy rested in part on
the ability of the Committee to explain its decisions clearly. This was particularly important given the
new target measure of inflation, the implications of which were best explored in the context of the next
Inflation Report, which would be the first to contain projections for the CPI.
mpc: 22 One member, however, despite the above factors and risks, put particular weight on the
continuing strong growth of household debt. If the repo rate were to rise as implied by current short-
term market interest rates, household income gearing could rise from its current moderate levels
towards levels last seen in the late 1980s and early 1990s. It was therefore appropriate to seek pro-
actively to moderate the build-up in levels of domestic borrowing now, in order to reduce the risk of an
abrupt adjustment to consumption further out. There was no evidence as yet that the November repo
rate increase was bringing this about. Against the background of positive news from the domestic and
world economy, a further rise in repo rate was therefore warranted. This would be a surprise to
financial markets, though the surprise would be one of timing not direction, since expectations of a
further rise in due course were already factored into market rates. An element of surprise might have
more impact on consumption, particularly that element of consumer demand which emanated from
increases in domestic borrowing, than one which was fully expected. That decision could be explained
in terms of the underlying data.
mpc: 23 The Governor invited members to vote on the proposition that the repo rate should be maintained
at 3.75%. Eight members (the Governor, Rachel Lomax, Kate Barker, Charles Bean, Marian Bell,
Richard Lambert, Stephen Nickell and Paul Tucker) voted in favour. One member (Andrew Large)
voted against, preferring to increase the repo rate by 25 basis points.
mpc: 24 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 Nick Stern 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 5 January 2004, in advance of its meeting on 7-8 January. 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: A2 Short-term interest rates had fallen in the United Kingdom, the euro area and the United States.
The economic data in the United States, and the consumer price index (CPI) figures in the United
Kingdom, had been weaker than the market had expected. The central market expectation had been
that there would not be any change in official rates in the United Kingdom in January. Expectations of
rate rises in the euro area had been put back, in part the result of the weaker-than-anticipated US data.
Expectations concerning US interest rates had also been influenced by comments pertaining to US
labour market weakness, in the minutes of the October FOMC meeting.
mpc: A3 Since the previous MPC meeting, ten-year nominal forward rates had fallen by over 20 basis
points in the United Kingdom. In the United States and the euro area, they had fallen by around 12
basis points and 5 basis points respectively. Ten-year break-even inflation rates had been broadly
unchanged on the month in the United Kingdom and United States, but had fallen by around 12 basis
points in the euro area. In the United Kingdom, forward annual RPI inflation expectations, as implied
by index-linked and nominal gilt yields, had risen slightly at maturities of less than three years, but had
fallen by over 10 basis points at maturities of around five years. Survey-based measures of UK RPIX
inflation expectations for 2004 had been unchanged. Consensus surveys suggested a slight rise in
inflation expectations in the United States and the euro area for 2004.
mpc: A4 The sterling effective exchange rate index (ERI) had appreciated by 1.7%, to 101.8. Sterling had
appreciated by 0.5% against the euro and by 5.4% against the US dollar. The euro had appreciated by
4.8% against the dollar. The dollar had depreciated by 1.9% against the yen, accompanied by further
Japanese intervention. The US dollar effective rate had fallen by 2.9%. Changes in relative longer-
term interest rate differentials could only partially account for the dollar depreciation, and market
contacts had suggested that concerns about the US current account deficit had continued to weigh on
the dollar.
mpc: A5 Between 3 December and 7 January, the FTSE All-Share index had risen by 1.7% and the FTSE
100 had increased by 1.8%. The FTSE 250 and FTSE Small-Cap indices had risen by 0.8% and 2.0%
respectively. Increases in share prices in the resource sector had accounted for just under half of the
increase in the FTSE All-Share index. The major international equity indices had also risen; the S&P
500 index by 5.8%, the DJ EuroStoxx by 2.3% and the Topix index by 3.5%. Uncertainty about future
movements in the FTSE 100 and S&P 500 indices, as measured by the volatility implied by options
prices, had fallen by 2.4 percentage points and 1.2 percentage points respectively and had remained
below recent averages. Uncertainty about the future level of the DJ EuroStoxx index had been broadly
unchanged. UK profit warnings in December had increased on the month, but remained broadly
unchanged compared with December 2002. Profit warnings in the United States had fallen in the past
month and remained below the average level for 2003. Between 3 December and 7 January, sterling
and dollar-denominated investment-grade option-adjusted spreads had fallen and euro-denominated
spreads had been unchanged. Investment-grade bond yields had fallen for all three currencies.
mpc:
II
The international environment
mpc: A6 The final estimate of US GDP growth in 2003 Q3, at 2.0% on the quarter, had been unchanged
from the preliminary estimate. Estimated consumption growth had been revised up, to 1.7% on the
quarter, from 1.6%. Government spending growth had been revised up, to 0.4% on the quarter, from
0.3%. Export growth had been revised down, to 2.4% on the quarter, from 2.7%; and import growth
had also been revised down, to 0.2% on the quarter, from 0.4%. The estimated net trade contribution
to GDP growth had been unchanged at 0.2 percentage points. The current account deficit had fallen to
4.9% of GDP, from 5.1% in 2003 Q2. Overall, the comprehensive revision of the National Income
and Product Accounts had left the recent profile of estimated US GDP growth broadly unchanged.
mpc: A7 Industrial production in the United States had increased by 0.9% on a month earlier in
November, following an increase of 0.4% in October. Total new orders had fallen by 6.2% on a month
earlier in November. The Institute for Supply Management (ISM) manufacturing index had increased
to 66.2 in December, from 62.8 in November, with the index for new orders reaching the highest level
since July 1950. The ISM non-manufacturing index had fallen to 58.6 in December, from 60.1 in
November.
mpc: A8 Real consumption in the United States had grown by 0.5% in November, after increasing by
0.1% in October. Retail sales had increased by 0.9% in November, having been unchanged in October
(revised up from 0.3% in the previous release). The Conference Board measure of US consumer
confidence had fallen to 91.3 in December, from 92.5 in November. The University of Michigan
headline index of consumer confidence had fallen to 92.6 in December, from 93.7 in November. US
non-farm payrolls had increased by 57,000 in November, following a rise of 137,000 in October.
mpc: A9 Annual headline consumer price inflation in the United States had fallen to 1.8% in November,
from 2.0% in October. Annual core consumer price inflation (which excludes food and energy prices)
had fallen to 1.1% in November, from 1.3% in October. US producer prices had risen by 3.4% in the
year to November, unchanged from the increase in the year to October.
mpc: A10 Euro-area GDP had increased by 0.4% on the quarter in 2003 Q3, compared with a fall of 0.1%
in 2003 Q2. Final domestic demand had made no contribution to quarterly GDP growth in 2003 Q3;
net trade had contributed 1.0 percentage points, while inventories had subtracted 0.6 percentage points.
French GDP had increased by 0.4% on the quarter in Q3 (unrevised from the first release), while
estimated French private consumption growth had been revised up to 0.5% on the quarter, from 0.4%
in the first release. Italian GDP growth had been unrevised in the latest release, at 0.5% on the quarter.
Italian private consumption had increased by 0.7% on the quarter, following an upwardly revised
increase of 0.5% in 2003 Q2. The contributions of inventories and net trade to GDP growth in Italy
had been large and almost offsetting. Estimated Dutch GDP growth in 2003 Q3 had been revised
down to zero in the latest release, from 0.1% in the first estimate.
mpc: A11 Industrial production in the euro area had increased by 1.1% on the month in October, following
a fall of 0.4% in September. According to the European Commission Survey, the euro-area business
confidence indicator had decreased to 8 in December, from an upwardly revised 6 in November.
The euro-area purchasing managers' index (PMI) for manufacturing had increased to 52.4 in
December, from 52.2 in November. The PMI for the services sector had fallen to 56.6 in December,
from 57.5 in November. The West-German IFO index had increased to 96.8 in December, from 95.7
in November.
A12 According to Eurostat, the volume of retail sales in the euro area had fallen by 0.6% on a year
earlier in September. The euro-area consumer confidence index had increased to 16 in November,
from 17 in October.
mpc: A13 According to Eurostat's flash estimate, annual inflation in the euro area, as measured by the
harmonised index of consumer prices (HICP), had fallen to 2.1% in December, from 2.2% in
November. Annual core inflation (excluding energy, food, alcohol and tobacco) had been unchanged
at 1.7% in November.
mpc: A14 According to the second release, real GDP in Japan had grown by 0.3% on a quarter earlier in
2003 Q3, compared with an estimate of 0.6% in the first release. This downward revision had
reflected weaker estimated domestic demand. In the second release, total investment had grown by
0.5% on the quarter, compared with an estimate of 2.8% in the first release. The estimated
contribution of net trade had been unchanged, at 0.2 percentage points, in the second release.
mpc: A15 Japanese export volumes had risen by 1.7% on a year earlier in November, following a rise of
7.5% in the year to October. Import volumes had risen by 3.4% on a year earlier in November,
following an increase of 8.9% in the year to October.
mpc: A16 The Japanese tertiary activity index had risen by 1.1% in October compared with the previous
month, while the all-activity index had increased by 0.8%. Industrial production in Japan had risen by
0.8% in November, following a rise of 1.0% in October. According to the Bank of Japan's December
Tankan survey, the large manufacturers' business conditions diffusion index had risen to +11, from +1
in September. The large non-manufacturers' diffusion index had increased to 9 in December, from
13 in September.
According to the all-households' survey, real living expenditure had fallen by 0.8%
in the year to October; it had fallen by 1.8% in the year to September.
mpc: A17 Since the Committee's previous meeting, the spot price of Brent crude oil had risen by $1.97 per
barrel to $31.24.
The Economist dollar non-oil commodity price index had fallen by 3.2% for food,
risen by 0.3% for non-food agricultural products and increased by 5.9% for metals.
III Money and credit
mpc: A18 The twelve-month growth rate of notes and coin (adjusted for special factors) had fallen to 7.0%
in December, from 8.0% in November. The twelve-month growth rate of M4 had risen to 7.0% in
November, from 6.6% in October. Annual growth of M4 lending (excluding the effects of
securitisations) had fallen to 11.6%, from 11.7%. Excluding other financial corporations (OFCs), the
annual M4 growth rate had risen to 8.7%, from 8.2%, and the annual M4 lending growth rate
(excluding the effects of securitisations) had fallen by 0.1 percentage points, to 13.4%.
A19 The twelve-month growth rate of households' M4 had fallen to 8.3% in November, from 8.4% in
October, and the annual growth rate of M4 lending to households (excluding the effects of
securitisations) had fallen to 15.1% in November, from 15.2% in October. Within total net lending to
individuals a measure that includes borrowing from a broader set of institutions than just banks and
building societies the annual growth rate of secured lending had been 14.4%, the same as in October.
The annual growth rate of unsecured lending had risen to 13.0%, from 12.9%. The annual growth rate
of credit card lending had fallen to 18.5%, from 19.0%, and annual growth in other unsecured lending
had risen to 10.7%, from 10.4% in October.
A20
As a proportion of personal disposable income, the amount of new unsecured lending had
fallen to 2.6% in Q3, from 2.8% in Q2, and mortgage equity withdrawal gross equity withdrawn
from the housing market minus gross injections had risen to 7.0% in Q3, from 6.0% in Q2. The
household sector's capital gearing gross liabilities as a percentage of gross assets had risen to
17.5% in Q3, from 17.4% in Q2. By contrast, the sector's income gearing gross interest payments as
a percentage of disposable income had fallen to 7.0% in Q3, from 7.1% in Q2. Allowing for regular
repayments of principal, the household sector's income gearing had fallen to 9.6% in Q3, from 9.7% in
Q2. The sector's debt-to-income ratio had risen to 1.35 in Q3, from 1.33 in Q2.
A21 The average standard variable mortgage rate (SVR) quoted for existing borrowers had risen by
25 basis points in December, to 5.58%, and the average two-year discounted rate had risen by 5 basis
points, to 4.22%. According to the latest data from the Council of Mortgage Lenders, the take-up of
fixed-rate mortgages had fallen to 28% of new mortgages in November, from 34% in October.
A22 Interest rates for unsecured lending quoted by banks and building societies had been broadly
similar to their levels in June 2003 (when the repo rate was also 3.75%). The exception had been for
personal loans: the average quoted rate for a personal loan of £10,000 had fallen by 43 basis points
between the end of June and the end of December, continuing a trend towards lower spreads on
unsecured debt.
A23 The number of loan approvals for house purchase, when adjusted for the number of working
days in the month, had risen to 119,000 in November, from 117,000 in October. Housing transaction
completions, measured by particulars delivered, had fallen by 16.8% in the latest three months
compared with the same three months a year earlier. Unsold stocks of properties, measured by the
Royal Institution of Chartered Surveyors (RICS), had fallen to 61 per surveyor in November, from 65
in October, while the number of sales per surveyor had risen to 31 in November, from 30 in October.
A24 The twelve-month growth rate of private non-financial corporations' (PNFCs') M4 had risen to
10.3% in November, from 7.4% in October. The annual growth rate of M4 lending to PNFCs
(excluding the effects of securitisations) had fallen to 8.5% in November, from 8.7% in October. The
flow of total external finance, a broad measure of PNFCs' funding, had been £5.3 billion in November,
compared with £3.2 billion in October.
A25 PNFCs' aggregate income gearing had fallen to 17.8% in Q3, from 18.2% in Q2, in part the
result of increases in PNFCs' gross operating surplus. PNFCs' aggregate capital gearing at
replacement cost had risen to 30.8% in Q3, from 28.9% in Q2, but had fallen at market value, from
34.1% to 33.7%.
mpc:
IV Demand and output
mpc: A26 The Quarterly National Accounts release for 2003 Q3 had been published on 23 December 2003.
Estimated real quarterly GDP growth at market prices had been revised up, to 0.8%, from 0.7% in the
previous release. Estimated annual GDP growth had been revised up, to 2.1%, from 2.0%. The latest
release had contained revisions to GDP and its components starting in 1999 Q1, the cumulative effect
of which had been to raise the estimate of the level of GDP at market prices by 0.1% in 2003 Q3.
mpc: A27 On the output side of the accounts, the estimated level of GDP at basic prices in 2003 Q3 had
been revised down by 0.3% relative to the previous release. Estimated GDP growth at basic prices in
Q3 had been unrevised, at 0.7%. Service sector output growth had been revised up, to 0.9%, from
0.8%, and manufacturing output growth had been revised up to 0.1%, from 0.0%. Construction output
growth had been revised down to 2.0%, from 2.5%. The cumulative revisions to past growth rates had
implied that the level of service sector output had been 0.1% higher in 2003 Q3 than previously
estimated, while the level of manufacturing output had been 0.2% higher.
mpc: A28 On the expenditure measure, the estimated quarterly growth rate of households' real
consumption (including the consumption of non-profit making institutions serving households) had
been revised up, to 0.9%, in 2003 Q3. The level of nominal government consumption had been
revised down by 1.3% in 2003 Q3. That, together with upward revisions to the government
consumption deflator, had implied that the level of real government consumption had been revised
down by 2.1%. Whole-economy investment growth in 2003 Q3 had been revised up, to 0.5%, from
1.3% in the previous release. Within that, business investment growth had been revised up, to 1.2%,
from 1.6%. Quarterly government investment growth in Q3 had been 5.6%.
mpc: A29 The level of final domestic demand had been revised down by 0.3% in 2003 Q3. Domestic
demand had grown by 0.8% in Q3, while the growth of final domestic demand had been 0.5%. The
contribution of inventories (including the net acquisition of valuables) to the quarterly growth of GDP
had been 0.3 percentage points in Q3. Stockbuilding had been almost entirely confined to the
manufacturing and the distributive trades sectors.
mpc: A30 Export growth in 2003 Q3 had been revised up, to 0.4%, from 0.1% in the previous release,
while import growth had been revised down, to 0.5%, from 1.0%. Excluding the effects of identified
missing trader intra-community (MTIC) fraud, export and import growth had been 1.0% and 1.2%
respectively. Net trade had made a zero contribution to GDP growth in 2003 Q3.
mpc: A31 The expenditure statistical discrepancy is the difference between GDP calculated as the average
of the output, income and expenditure measures, and GDP measured by the sum of the expenditure
components. In 2003 Q3, this discrepancy had been revised up. It was estimated at 0.5% of GDP,
implying that the expenditure data had been weaker than the available output and income data.
mpc: A32 Households' real post-tax income had risen by 1.5% in 2003 Q3, reflecting growth in both labour
and non-labour income. The increase in non-labour income in turn reflected increased investment
income from insurance company and pension fund reserves held on behalf on households. The
household saving ratio had risen to 5.9% in 2003 Q3, and had been revised up in the previous three
quarters. The household sector had remained in financial deficit for the seventh consecutive quarter,
but households' net financial deficit had shrunk to 0.5% of GDP in 2003 Q3.
mpc: A33 The gross operating surplus of private corporations (excluding the alignment adjustment) had
risen by 2.8% in 2003 Q3, up from 0.9% in Q2. That had been largely accounted for by a 3.2%
increase in the gross trading profits of non-oil private non-financial corporations in Q3. Private
corporations' financial surplus (excluding the alignment adjustment) had fallen, to 1.1% of GDP in
Q3. The public sector net financial deficit had fallen slightly, to 2.6% of GDP in Q3, and the current
account deficit had remained broadly unchanged, at 2.9% of GDP.
mpc: A34 Turning to indicators of output in 2003 Q4, industrial production had increased by 1.0% in
October. Manufacturing output had increased by 1.0%, while energy output had risen by 0.8%. The
Chartered Institute of Purchasing and Supply (CIPS) manufacturing survey output index had risen to
58.4 in December, from 58.1 in November, but the new orders index had fallen slightly, to 57.6 in
December, from 57.8 in November. Both indices had continued to point to strong manufacturing
output growth. The expected output balance and total orders balance in the Confederation of British
Industry (CBI) Monthly Trends enquiry had both increased on the month. The former had increased to
+5 in December, from 2 in November; the latter had risen to 19 in December, from 24 in
November. The CIPS services survey business activity index had fallen slightly, to 58.5, in December,
from 59.6 in November, and the incoming new business index had also fallen, to 59.0 from 60.1. But
both indices had remained well above the `no change' level of 50.
mpc: A35 Turning to indicators of expenditure in 2003 Q4, retail sales had grown by 0.1% in November,
following growth of 0.6% in October. In the CBI Distributive Trades survey, the balance of retailers
reporting positive annual growth in sales volumes had increased to +33 in December, from +19 in
November. The balance reporting sales volumes above average for the time of year had also increased
slightly, having fallen sharply in November. The GfK consumer confidence balance had been broadly
unchanged in December, increasing to 5, from 6 in November. Quarterly house price inflation
measured by the Halifax index had increased to 3.9% in 2003 Q4, from 3.7% in Q3. And the quarterly
change in the Nationwide house price index had risen to 4.2% in Q4, from 3.1% in Q3.
mpc: A36 Excluding oil and erratics, goods export volumes had increased by 2.2% in October, after falling
in August and September. Exports to EU countries had remained weak, falling by 1.1% in October.
By contrast, exports to non-EU countries had increased by 6.5% in October. Goods import volumes
had increased by 2.4% in October. The total deficit on trade in goods (including oil and erratics) had
narrowed slightly, to £4.4 billion in October from £4.7 billion in September.
mpc: A37 According to the Labour Force Survey (LFS), employment had increased by 37,000 in the three
months to October, compared with the previous three months. The rise in employment in the three
months to October had been more than accounted for by self-employment (up 103,000) and part-time
employment (up 42,000). The working-age employment rate had fallen 0.1 percentage points, to
74.6%, compared with the previous three months, but had been unchanged compared with the same
three months a year earlier. Workforce jobs had increased by 63,000 in the third quarter, including an
increase of 41,000 in the construction sector.
mpc: A38 Total hours worked had fallen by 0.4% in the three months to October, but had increased by
0.3% on a year earlier. Average hours in the three months to October had fallen by 0.6%, both on the
previous three months and on a year earlier.
mpc: A39 The overall CIPS employment index for December had suggested further strengthening in
private sector employment. The CIPS manufacturing and services indices had both ticked up, while
the construction index had fallen slightly. All three had been above the `no change' level of 50.
mpc: A40 The LFS measure of unemployment had fallen by 33,000 in the three months to October
compared with the previous three months, and had been 71,000 lower than in the same three months a
year earlier. The unemployment rate had fallen to 5.0%, down 0.1 percentage points on the previous
three months and 0.3 percentage points lower than a year earlier. In November, the claimant count
unemployment rate had been unchanged. Outflows from the claimant count had risen by 1,100, while
inflows had fallen by 700. Working-age inactivity had increased by 76,000 in the three months to
October. The working-age inactivity rate had increased by 0.2 percentage points, both on the previous
three months and on a year earlier, to 21.4%.
mpc: A41 Overall annual whole-economy earnings growth had been 3.6% in the three months to October,
unchanged from September. Private sector pay growth had increased by 0.1 percentage points, to
mpc: 3.2%, while public sector pay growth had fallen by 0.2 percentage points, to 5.4%. Actual whole-
economy earnings growth in the year to October had been 3.7%, unchanged from the previous month.
Annual whole-economy earnings growth excluding bonuses had been 3.7% in the three months to
October, unchanged from September. The comparable private sector growth rate had increased by 0.1
percentage points, to 3.3%, while public sector growth had fallen by 0.2 percentage points, to 5.4%.
mpc: A42 According to the settlements information available to the Bank, the whole-economy twelve-
month average earnings index (AEI)-weighted mean settlement had been 3.2% in November,
unchanged on the previous month. The twelve-month sample-weighted mean settlement for the public
sector had ticked down by 0.1 percentage points, to 3.4% in November.
mpc: A43 Sterling oil prices had been broadly unchanged in December, compared with November.
A44 Manufacturing input prices had been unchanged in November. Because of base effects, the
annual inflation rate had risen to 4.0% in November, from 1.9% in October. Looking ahead, the CIPS
manufacturing survey had pointed to rising input prices in December. The input price index had risen
to 56.7, from 55.1 in November.
A45 Manufacturing output prices excluding duties (PPIY) had risen by 0.4% in November. The
annual inflation rate had risen to 1.5% in November, from 1.3% in October. Survey data had pointed
to less downward pressure on output prices in the future. The expected output price balance from the
CBI Monthly Trends survey had risen to 3 in December, its highest level in nearly three years.
A46 According to December's National Accounts release, the GDP deflator at market prices had risen
by 0.4% in 2003 Q3, and by 3.2% in the year to Q3, compared with 3.4% in the year to Q2. Within
that, in the year to Q3 the household consumption deflator had increased by 1.5%; the estimated
government consumption deflator had been revised up and had increased by 8.3% (down from 8.8% in
Q2); the exports deflator had risen by 1.9%; and the imports deflator had risen by 1.0%.
A47 Annual CPI inflation had fallen by 0.1 percentage points, to 1.3%, in November. Within that,
both annual goods price inflation and annual services price inflation had been unchanged, at 0.3%
and 3.2% respectively. Annual RPIX inflation had fallen by 0.2 percentage points, to 2.5%, in
November. Annual RPI and RPIY inflation had both fallen, to 2.5% and 2.1% respectively.
VII Reports by the Bank's Agents
A48 The Bank's regional Agents reported that, in the month leading up to Christmas, the annual
growth rate of retail sales at current prices had possibly been the lowest since the previous July. This
had followed official data that had indicated a weak picture for retail sales in November. Recent
developments had been difficult to interpret, in large part because of changing patterns of consumer
spending. For example, it had appeared that changes in shopping patterns had gathered pace last year,
with supermarkets and, to a lesser extent, internet retailers taking market share from many high street
shops. Overall, it had appeared that retail sales had remained weak in early December, with many
retailers reducing prices, especially for clothing, in order to encourage demand. Retail spending had
only begun to pick up strongly a few days before Christmas. However, for many high street retailers,
this late surge had been insufficient to make up for relatively weak sales earlier in the month. Even so,
the volume of retail sales in December had perhaps increased slightly compared with November,
stimulated by a greater than normal degree of price discounting for that time of the year.