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mpc: 28 Committee members agreed that recent developments did not provide grounds for substantially
changing their views about the medium-term prospects for activity. Given those prospects, and the
significant degree of spare capacity in the economy, Committee members continued to expect inflation
to fall below the target for a period once the various near-term price-level shocks to inflation had
worked through. The projections and analysis prepared in advance of the February <i>Inflation Report </i>
would enable a more comprehensive assessment of the latest information about the supply potential of
the economy, as well as the impact of the various headwinds and tailwinds affecting activity and
inflation.
http://mpc.theyserveforyou.com/meetings/2010/3/3/42
mpc: 29 The Governor invited the Committee to vote on the proposition that:
http://mpc.theyserveforyou.com/meetings/2010/3/3/43
mpc: Bank Rate should be maintained at 0.5%;
http://mpc.theyserveforyou.com/meetings/2010/3/3/44
mpc: The Bank of England should continue with the programme, as announced following its
5 November meeting, of asset purchases totalling £200 billion financed by the creation of
central bank reserves.
http://mpc.theyserveforyou.com/meetings/2010/3/3/45
mpc: The Committee voted unanimously in favour of the proposition.
http://mpc.theyserveforyou.com/meetings/2010/3/3/46
mpc: 30 The following members of the Committee were present: Mervyn King, Governor Charles Bean, Deputy Governor responsible for monetary policy Paul Tucker, Deputy Governor responsible for financial stability Kate Barker Spencer Dale Paul Fisher David Miles Adam Posen Andrew Sentance Nicholas Macpherson was present as the Treasury representative.<h4> </h4>
http://mpc.theyserveforyou.com/meetings/2010/3/3/47
mpc: </BODY>
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http://mpc.theyserveforyou.com/meetings/2010/3/3/48
mpc: 25 The most recent data provided mixed signals about the current state of demand. The quarterly
National Accounts still pointed to a contraction in the third quarter. Taken together, the latest surveys
were, on balance, consistent with growth during the fourth quarter. In November, private
non-financial companies had raised positive net finance for the first time since the summer, and there
was evidence of some improvement in the availability of bank credit. But the growth in households'
and private non-financial companies' money balances remained subdued. The pattern of
developments from the rest of the world had been similar to that of previous months: there was
growing evidence of a global recovery, but one that was centred on emerging Asia and in which the
United Kingdom's main trading partner, the euro area, was growing only slowly.
http://mpc.theyserveforyou.com/meetings/2010/3/3/39
mpc: 26 Overall, the data were consistent with the view that the UK economy had begun to expand again,
albeit weakly. But the strength and durability of any recovery would depend on the interplay of the
significant tailwinds and headwinds affecting activity. The main supports to activity remained the
significant degree of policy stimulus and the past depreciation of sterling. It was unclear how much
net trade had yet responded to that depreciation, but the Committee agreed that some boost would
eventually occur.
http://mpc.theyserveforyou.com/meetings/2010/3/3/40
mpc: 27 There remained powerful headwinds impeding the recovery. The supply of bank credit was
likely to remain impaired for a sustained period as banks sought to adjust their balance sheets and
refinance their own funding maturing over the coming years. Uncertainty about prospective incomes
was likely to prompt more cautious behaviour by households, encouraging greater saving than in the
past, and investment was unlikely to recover strongly so long as a significant margin of spare capacity
existed in the economy. In addition, it was clear that a significant fiscal consolidation was needed in
the United Kingdom, the precise nature and pace of which remained unclear, and to which monetary
policy would need to respond as new information became available.
http://mpc.theyserveforyou.com/meetings/2010/3/3/41
mpc: 22 There was limited new information about the supply potential of the economy. Neither the LFS
nor claimant count measures of unemployment had suggested much change in the degree of labour
market slack during the second half of 2009. The available measures of capacity utilisation pointed to
little change in the margin of spare capacity within firms over the fourth quarter of 2009, which
remained very substantial. The disruption to the supply of credit was likely to have a significant
negative impact on supply potential. That might be offset, to some extent, if corporate liquidations
continued to run at a low rate when compared to previous recessions. The Committee agreed that
further analysis of the extent of the decline in potential output was required.
http://mpc.theyserveforyou.com/meetings/2010/3/3/35
mpc: <h4>The immediate policy decision </h4>
http://mpc.theyserveforyou.com/meetings/2010/3/3/36
mpc: 23 It was increasingly probable that CPI inflation would rise to well above the 2% target in the early
part of 2010 and remain elevated for several months. The most recent intelligence about the likely
pass-through of the January VAT rise and the potential impact on energy prices from the unusually
cold weather suggested that inflation in the short term would be further above target than the
Committee had previously expected.
http://mpc.theyserveforyou.com/meetings/2010/3/3/37
mpc: 24 There was a risk that a sustained period of above-target inflation could cause inflation
expectations to drift upwards. The Committee would monitor closely the extent to which price-level
shocks affected inflation expectations. But so long as expectations remained consistent with the 2%
target, the medium-term outlook for inflation the key consideration when setting monetary policy
would reflect the balance between demand and the supply potential of the economy. The available
evidence continued to suggest that this balance would bear down on inflation for a considerable period.
http://mpc.theyserveforyou.com/meetings/2010/3/3/38
mpc: 18 CPI inflation had risen to 1.9% in November, largely as a result of an increase in petrol price
inflation. This factor, along with the reversal of the December 2008 VAT cut, was set to boost
inflation further in forthcoming months. Moreover, the latest reports from the Bank's regional Agents
suggested that the pass-through of the increase in VAT in January 2010 by businesses to final
consumers might be somewhat greater than had been previously assumed, although that remained
uncertain. And persistence of the unusually cold weather, which had led to an increase in wholesale
energy prices, could reduce the possibility of retail utility price cuts in the spring. The combined
impact of all these factors on inflation was likely to be substantial but temporary.
http://mpc.theyserveforyou.com/meetings/2010/3/3/31
mpc: 19 In contrast to the short-term inflation outlook, the YouGov/Citigroup survey measure of
households' longer-term inflation expectations, which had edged up in previous months, had dropped
back. Measures of forward inflation derived from financial market prices remained little changed.
Taking the data together, there was little evidence that household or financial market inflation
expectations had changed materially in the second half of 2009.
http://mpc.theyserveforyou.com/meetings/2010/3/3/32
mpc: 20 Pay growth remained subdued. Private sector annual regular pay growth had remained broadly
unchanged in the three months to October according to the average earnings index and had declined
slightly according to the average weekly earnings measure. But these measures of earnings would be
substantially boosted in early 2010 if financial sector firms increased remuneration materially. The
latest indications were that both the regular pay and bonus components of financial sector
remuneration were set to rise significantly compared with 2009. The implications of higher bonuses in
the financial sector for domestic inflation were likely to be small.
http://mpc.theyserveforyou.com/meetings/2010/3/3/33
mpc: 21 According to the latest LFS data, employment had risen by 53,000 in the three months to
October compared with the previous non-overlapping quarter, although this increase masked a
continuing decline in full-time employment. The more timely claimant count measure of
unemployment had fallen by 6,000 in November, its first decline since February 2008. Survey
indicators provided some evidence that hiring intentions were firming. Overall, the data continued to
suggest that the labour market had fared less badly than might have been expected given the published
GDP data. It was possible that there would be revisions to the National Accounts, removing some of
this apparent tension, but there was also a risk that the labour market could deteriorate further. That
could occur, for example, if firms had made employment decisions on the basis of output expectations
which were subsequently disappointed. An alternative risk was that an improvement in labour market
conditions, consistent with recent trends and some of the surveys of hiring intentions, combined with
buoyant financial sector earnings during the first quarter of 2010, could increase pay pressures more
generally across the economy. That might be tempered somewhat by the prospect of public sector pay
restraint.
http://mpc.theyserveforyou.com/meetings/2010/3/3/34
mpc: 15 Household consumption was estimated to have been broadly flat over the third quarter, with a
further decline in consumer services offset by higher spending on goods. More coincident indicators
suggested that retail spending had continued growing during the final quarter. There were some early
signs, including from the Bank's regional Agents, that spending had been robust around Christmas,
although it was possible that some spending had been brought forward ahead of the increase in VAT at
the start of 2010. After a series of sharp falls, total investment had risen slightly during the third
quarter, while business investment appeared to be close to a trough. A fuller analysis of the
Government's <i>Pre-Budget Report</i> than had been possible when the Committee had met in December
implied that the published plans did not contain significant news for the outlook relative to the
assumptions underlying the November <i>Inflation Report</i> projections.
http://mpc.theyserveforyou.com/meetings/2010/3/3/28
mpc: 16 Given the substantial depreciation in sterling that had taken place since 2007, net trade could be
expected to contribute positively to a recovery. According to the latest data, however, net trade
subtracted slightly from growth during the third quarter, and there was little evidence that UK
exporters had increased their share in global markets. Export price data implied that UK exporters had
so far absorbed the majority of sterling's depreciation in higher margins, rather than reduced their
foreign currency export prices. That could imply that the boost to exports from the depreciation in
sterling would come about more slowly, perhaps through an increase in export supply as new firms
entered the market, than if export prices had been cut more sharply. In contrast, the majority of the
depreciation appeared to have been passed through to import prices, although there was limited
evidence yet of widespread expenditure switching away from imports and towards domestically
produced goods and services. But trade data were particularly prone to revision and were volatile from
quarter to quarter, providing grounds for interpreting the latest export and import numbers cautiously.
And some survey-based indicators suggested that UK firms had become increasingly positive about
the prospects for exports.
http://mpc.theyserveforyou.com/meetings/2010/3/3/29
mpc: 17 Survey indicators had painted a mixed picture of growth in the fourth quarter. The CIPS surveys
were consistent with robust growth, but the CBI and BCC surveys suggested more subdued activity.
<h4>Supply, costs and prices </h4>
http://mpc.theyserveforyou.com/meetings/2010/3/3/30
mpc: 13 The supply of bank credit remained constrained and was likely to remain significantly impaired
until the banking sector had completed the process of balance sheet restructuring. Nevertheless, there
were tentative signs that the supply of bank credit had increased in recent months. There had been a
gradual resumption in mortgage lending and the latest survey indicators, including from the Bank's
<i>Credit Conditions Survey</i>, suggested that credit conditions for both households and firms had eased
somewhat in recent months, albeit less so for small and medium-sized companies. The surveys
suggested that lenders expected this mild improvement to continue.
http://mpc.theyserveforyou.com/meetings/2010/3/3/26
mpc: 14 According to the latest official estimates, GDP had declined by 0.2% in the third quarter, a
marginally smaller decline than had been previously estimated. Those estimates suggested
stockbuilding had subtracted even more sharply from growth around the beginning of 2009 than
previous data vintages had implied, but that a reduction in the pace of de-stocking had boosted growth
by an estimated 0.8 percentage points over the second and third quarters combined. It was likely that
inventories would continue to make a positive contribution to growth in the near term as the pace of
de-stocking eased further. Sustained growth would be dependent on a pickup in final demand, though
in this respect the Q3 data had also been positive, showing a 0.4% rise in domestic final demand on the
previous quarter.
http://mpc.theyserveforyou.com/meetings/2010/3/3/27
mpc: 9
The early stages of the global recovery had been less synchronised than the 2008 downturn had
been. China had grown rapidly, with broad money growth perhaps providing an early signal that
inflationary pressures were building. And there was strong activity growth in other emerging Asian
economies. Indicators of fourth-quarter activity in the United States had generally been encouraging
and there were signs that the housing market was stabilising. But, as in other countries, the recovery in
the United States had been spurred by significant policy stimulus, and its durability remained
uncertain. Recovery in parts of Europe remained weak, with headwinds from financial sector
deleveraging and stretched fiscal positions in some countries combining with the appreciation of the
euro to restrain activity.
http://mpc.theyserveforyou.com/meetings/2010/3/3/22
mpc: 10 It appeared that much of the narrowing in current account imbalances that had occurred in the
recent past reflected cyclical factors, and there was a risk that the ongoing recovery would lead to a
re-widening of global imbalances. If so, that could increase the risk of protectionist measures.
<h4>Money, credit, demand and output </h4>
http://mpc.theyserveforyou.com/meetings/2010/3/3/23
mpc: 11 M4, adjusted to exclude the money holdings of institutions that intermediate funds between
banks, had increased by over £14 billion in November following a decline of nearly £10 billion in the
previous month. This turnaround largely reflected the activities of other non-bank financial
companies, such as pension funds and unit trusts. Those companies' activities were likely to continue
to inject considerable volatility into monthly M4 flows. The growth in households' and private
non-financial companies' money holdings had remained subdued. But it seemed increasingly likely
that non-financial companies' money holdings had troughed during the second half of 2008: the
annual growth rate in these balances had risen to nearly 5% in November.
http://mpc.theyserveforyou.com/meetings/2010/3/3/24
mpc: 12 UK private non-financial companies had raised net new finance in November for the first time
since June. Net bank borrowing had been virtually flat; instead the funds had largely been raised from
capital markets. Bond finance raised from capital markets over the first eleven months of 2009 had
been at record levels, although net debt issuance had been broadly in line with previous years. Net
equity issuance had been much stronger than previously. The strength of net equity issuance would
support the process of corporate sector balance sheet deleveraging. Almost three quarters of listed
equity issues in 2009 had been for less than £5 million, suggesting that equity markets had offered an
alternative source of finance for smaller companies.
http://mpc.theyserveforyou.com/meetings/2010/3/3/25
mpc: 5
Dollar oil prices had risen by around 14% over the month, and were around 7% higher than the
assumption embodied in the November <i>Inflation Report</i>. This rise was likely to reflect the impact of
unusually cold weather in much of the northern hemisphere. Timely data suggested that total private
oil stocks in the United States had fallen during the month, but remained high by recent standards.
Political instability in a number of oil-producing areas might also have contributed to the rise in oil
prices.
http://mpc.theyserveforyou.com/meetings/2010/3/3/17
mpc: 6
On an effective exchange rate basis, sterling was unchanged compared with a month earlier and
the dollar had appreciated by around 2%.
http://mpc.theyserveforyou.com/meetings/2010/3/3/18
mpc: <h4>The international economy </h4>
http://mpc.theyserveforyou.com/meetings/2010/3/3/19
mpc: 7
Data over the month remained consistent with a continued global recovery, albeit one that
remained heavily dependent on policy stimulus and subject to downside risks.
http://mpc.theyserveforyou.com/meetings/2010/3/3/20
mpc: 8
Indicators suggested that global manufacturing, which had contracted severely during the
downturn, continued to recover. JPMorgan's global manufacturing Purchasing Managers' Index had
risen further to 55.0 in December, compared with a low of 33.9 a year earlier. To some extent that
rebound was likely to have reflected an unwinding of the stock cycle. The durability of the recovery in
manufacturing output would be a function of developments in final demand. There were some positive
indicators here too: global car sales had remained buoyant in November, despite the ending of some
car scrappage schemes; and retail sales reports in many countries pointed to rising consumer spending.
http://mpc.theyserveforyou.com/meetings/2010/3/3/21
mpc: 4
Equity prices had risen strongly on the month, with the major indices in the United Kingdom,
United States and euro area increasing by 4%-7%. These increases were also consistent with greater
confidence about the prospects for global recovery.
http://mpc.theyserveforyou.com/meetings/2010/3/3/16
mpc:
http://mpc.theyserveforyou.com/meetings/2010/3/3/11
mpc: <h4>MINUTES OF THE MONETARY POLICY COMMITTEE MEETING HELD ON 6 AND 7 JANUARY 2010 </h4> 1
Before turning to its immediate policy decision, the Committee discussed financial market
developments; the international economy; money, credit, demand and output; and supply, costs and
prices.
http://mpc.theyserveforyou.com/meetings/2010/3/3/12
mpc: <h4>Financial markets </h4>
http://mpc.theyserveforyou.com/meetings/2010/3/3/13
mpc: 2
Financial market prices had been somewhat volatile over the month as thin trading volumes in
many markets over the year-end had accentuated some price movements.
http://mpc.theyserveforyou.com/meetings/2010/3/3/14
mpc: 3
Interest rates across the yield curve had risen internationally over the month. Short-term interest
rates one year ahead had risen in the United Kingdom, United States, and euro area, offsetting to
varying extents the falls that had occurred the month before. Longer-term government bond yields had
also risen internationally, with ten-year nominal spot rates on UK and US government debt increasing
by almost 40 basis points. Long-term real interest rates had also risen in the United Kingdom, albeit
from historically low levels. The rise in long-term interest rates could have reflected heightened
concerns about the scale of government debt issuance. It was also possible that short and long-term
rates had risen internationally as financial market participants had become more confident about the
prospects for global recovery.
http://mpc.theyserveforyou.com/meetings/2010/3/3/15
mpc: </BODY>
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http://mpc.theyserveforyou.com/meetings/2010/1/6/48
mpc: The Committee voted unanimously in favour of the proposition.
http://mpc.theyserveforyou.com/meetings/2010/1/6/46
mpc: 30 The following members of the Committee were present: Mervyn King, Governor Charles Bean, Deputy Governor responsible for monetary policy Paul Tucker, Deputy Governor responsible for financial stability Kate Barker Spencer Dale Paul Fisher David Miles Adam Posen Andrew Sentance Nicholas Macpherson was present as the Treasury representative.<h4> </h4>
http://mpc.theyserveforyou.com/meetings/2010/1/6/47
mpc: 29 The Governor invited the Committee to vote on the proposition that:
http://mpc.theyserveforyou.com/meetings/2010/1/6/43
mpc: Bank Rate should be maintained at 0.5%;
http://mpc.theyserveforyou.com/meetings/2010/1/6/44
mpc: The Bank of England should continue with the programme, as announced following its
5 November meeting, of asset purchases totalling £200 billion financed by the creation of
central bank reserves.
http://mpc.theyserveforyou.com/meetings/2010/1/6/45
mpc: 28 Committee members agreed that recent developments did not provide grounds for substantially
changing their views about the medium-term prospects for activity. Given those prospects, and the
significant degree of spare capacity in the economy, Committee members continued to expect inflation
to fall below the target for a period once the various near-term price-level shocks to inflation had
worked through. The projections and analysis prepared in advance of the February <i>Inflation Report </i>
would enable a more comprehensive assessment of the latest information about the supply potential of
the economy, as well as the impact of the various headwinds and tailwinds affecting activity and
inflation.
http://mpc.theyserveforyou.com/meetings/2010/1/6/42
mpc: 27 There remained powerful headwinds impeding the recovery. The supply of bank credit was
likely to remain impaired for a sustained period as banks sought to adjust their balance sheets and
refinance their own funding maturing over the coming years. Uncertainty about prospective incomes
was likely to prompt more cautious behaviour by households, encouraging greater saving than in the
past, and investment was unlikely to recover strongly so long as a significant margin of spare capacity
existed in the economy. In addition, it was clear that a significant fiscal consolidation was needed in
the United Kingdom, the precise nature and pace of which remained unclear, and to which monetary
policy would need to respond as new information became available.
http://mpc.theyserveforyou.com/meetings/2010/1/6/41
mpc: 26 Overall, the data were consistent with the view that the UK economy had begun to expand again,
albeit weakly. But the strength and durability of any recovery would depend on the interplay of the
significant tailwinds and headwinds affecting activity. The main supports to activity remained the
significant degree of policy stimulus and the past depreciation of sterling. It was unclear how much
net trade had yet responded to that depreciation, but the Committee agreed that some boost would
eventually occur.
http://mpc.theyserveforyou.com/meetings/2010/1/6/40
mpc: 25 The most recent data provided mixed signals about the current state of demand. The quarterly
National Accounts still pointed to a contraction in the third quarter. Taken together, the latest surveys
were, on balance, consistent with growth during the fourth quarter. In November, private
non-financial companies had raised positive net finance for the first time since the summer, and there
was evidence of some improvement in the availability of bank credit. But the growth in households'
and private non-financial companies' money balances remained subdued. The pattern of
developments from the rest of the world had been similar to that of previous months: there was
growing evidence of a global recovery, but one that was centred on emerging Asia and in which the
United Kingdom's main trading partner, the euro area, was growing only slowly.
http://mpc.theyserveforyou.com/meetings/2010/1/6/39
mpc: 24 There was a risk that a sustained period of above-target inflation could cause inflation
expectations to drift upwards. The Committee would monitor closely the extent to which price-level
shocks affected inflation expectations. But so long as expectations remained consistent with the 2%
target, the medium-term outlook for inflation the key consideration when setting monetary policy
would reflect the balance between demand and the supply potential of the economy. The available
evidence continued to suggest that this balance would bear down on inflation for a considerable period.
http://mpc.theyserveforyou.com/meetings/2010/1/6/38
mpc: <h4>The immediate policy decision </h4>
http://mpc.theyserveforyou.com/meetings/2010/1/6/36
mpc: 23 It was increasingly probable that CPI inflation would rise to well above the 2% target in the early
part of 2010 and remain elevated for several months. The most recent intelligence about the likely
pass-through of the January VAT rise and the potential impact on energy prices from the unusually
cold weather suggested that inflation in the short term would be further above target than the
Committee had previously expected.
http://mpc.theyserveforyou.com/meetings/2010/1/6/37
mpc: 22 There was limited new information about the supply potential of the economy. Neither the LFS
nor claimant count measures of unemployment had suggested much change in the degree of labour
market slack during the second half of 2009. The available measures of capacity utilisation pointed to
little change in the margin of spare capacity within firms over the fourth quarter of 2009, which
remained very substantial. The disruption to the supply of credit was likely to have a significant
negative impact on supply potential. That might be offset, to some extent, if corporate liquidations
continued to run at a low rate when compared to previous recessions. The Committee agreed that
further analysis of the extent of the decline in potential output was required.
http://mpc.theyserveforyou.com/meetings/2010/1/6/35
mpc: 21 According to the latest LFS data, employment had risen by 53,000 in the three months to
October compared with the previous non-overlapping quarter, although this increase masked a
continuing decline in full-time employment. The more timely claimant count measure of
unemployment had fallen by 6,000 in November, its first decline since February 2008. Survey
indicators provided some evidence that hiring intentions were firming. Overall, the data continued to
suggest that the labour market had fared less badly than might have been expected given the published
GDP data. It was possible that there would be revisions to the National Accounts, removing some of
this apparent tension, but there was also a risk that the labour market could deteriorate further. That
could occur, for example, if firms had made employment decisions on the basis of output expectations
which were subsequently disappointed. An alternative risk was that an improvement in labour market
conditions, consistent with recent trends and some of the surveys of hiring intentions, combined with
buoyant financial sector earnings during the first quarter of 2010, could increase pay pressures more
generally across the economy. That might be tempered somewhat by the prospect of public sector pay
restraint.
http://mpc.theyserveforyou.com/meetings/2010/1/6/34
mpc: 20 Pay growth remained subdued. Private sector annual regular pay growth had remained broadly
unchanged in the three months to October according to the average earnings index and had declined
slightly according to the average weekly earnings measure. But these measures of earnings would be
substantially boosted in early 2010 if financial sector firms increased remuneration materially. The
latest indications were that both the regular pay and bonus components of financial sector
remuneration were set to rise significantly compared with 2009. The implications of higher bonuses in
the financial sector for domestic inflation were likely to be small.
http://mpc.theyserveforyou.com/meetings/2010/1/6/33
mpc: 19 In contrast to the short-term inflation outlook, the YouGov/Citigroup survey measure of
households' longer-term inflation expectations, which had edged up in previous months, had dropped
back. Measures of forward inflation derived from financial market prices remained little changed.
Taking the data together, there was little evidence that household or financial market inflation
expectations had changed materially in the second half of 2009.
http://mpc.theyserveforyou.com/meetings/2010/1/6/32
mpc: 17 Survey indicators had painted a mixed picture of growth in the fourth quarter. The CIPS surveys
were consistent with robust growth, but the CBI and BCC surveys suggested more subdued activity.
<h4>Supply, costs and prices </h4>
http://mpc.theyserveforyou.com/meetings/2010/1/6/30
mpc: 18 CPI inflation had risen to 1.9% in November, largely as a result of an increase in petrol price
inflation. This factor, along with the reversal of the December 2008 VAT cut, was set to boost
inflation further in forthcoming months. Moreover, the latest reports from the Bank's regional Agents
suggested that the pass-through of the increase in VAT in January 2010 by businesses to final
consumers might be somewhat greater than had been previously assumed, although that remained
uncertain. And persistence of the unusually cold weather, which had led to an increase in wholesale
energy prices, could reduce the possibility of retail utility price cuts in the spring. The combined
impact of all these factors on inflation was likely to be substantial but temporary.
http://mpc.theyserveforyou.com/meetings/2010/1/6/31
mpc: 16 Given the substantial depreciation in sterling that had taken place since 2007, net trade could be
expected to contribute positively to a recovery. According to the latest data, however, net trade
subtracted slightly from growth during the third quarter, and there was little evidence that UK
exporters had increased their share in global markets. Export price data implied that UK exporters had
so far absorbed the majority of sterling's depreciation in higher margins, rather than reduced their
foreign currency export prices. That could imply that the boost to exports from the depreciation in
sterling would come about more slowly, perhaps through an increase in export supply as new firms
entered the market, than if export prices had been cut more sharply. In contrast, the majority of the
depreciation appeared to have been passed through to import prices, although there was limited
evidence yet of widespread expenditure switching away from imports and towards domestically
produced goods and services. But trade data were particularly prone to revision and were volatile from
quarter to quarter, providing grounds for interpreting the latest export and import numbers cautiously.
And some survey-based indicators suggested that UK firms had become increasingly positive about
the prospects for exports.
http://mpc.theyserveforyou.com/meetings/2010/1/6/29
mpc: 15 Household consumption was estimated to have been broadly flat over the third quarter, with a
further decline in consumer services offset by higher spending on goods. More coincident indicators
suggested that retail spending had continued growing during the final quarter. There were some early
signs, including from the Bank's regional Agents, that spending had been robust around Christmas,
although it was possible that some spending had been brought forward ahead of the increase in VAT at
the start of 2010. After a series of sharp falls, total investment had risen slightly during the third
quarter, while business investment appeared to be close to a trough. A fuller analysis of the
Government's <i>Pre-Budget Report</i> than had been possible when the Committee had met in December
implied that the published plans did not contain significant news for the outlook relative to the
assumptions underlying the November <i>Inflation Report</i> projections.
http://mpc.theyserveforyou.com/meetings/2010/1/6/28
mpc: 14 According to the latest official estimates, GDP had declined by 0.2% in the third quarter, a
marginally smaller decline than had been previously estimated. Those estimates suggested
stockbuilding had subtracted even more sharply from growth around the beginning of 2009 than
previous data vintages had implied, but that a reduction in the pace of de-stocking had boosted growth
by an estimated 0.8 percentage points over the second and third quarters combined. It was likely that
inventories would continue to make a positive contribution to growth in the near term as the pace of
de-stocking eased further. Sustained growth would be dependent on a pickup in final demand, though
in this respect the Q3 data had also been positive, showing a 0.4% rise in domestic final demand on the
previous quarter.
http://mpc.theyserveforyou.com/meetings/2010/1/6/27
mpc: 13 The supply of bank credit remained constrained and was likely to remain significantly impaired
until the banking sector had completed the process of balance sheet restructuring. Nevertheless, there
were tentative signs that the supply of bank credit had increased in recent months. There had been a
gradual resumption in mortgage lending and the latest survey indicators, including from the Bank's
<i>Credit Conditions Survey</i>, suggested that credit conditions for both households and firms had eased
somewhat in recent months, albeit less so for small and medium-sized companies. The surveys
suggested that lenders expected this mild improvement to continue.
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mpc: 12 UK private non-financial companies had raised net new finance in November for the first time
since June. Net bank borrowing had been virtually flat; instead the funds had largely been raised from
capital markets. Bond finance raised from capital markets over the first eleven months of 2009 had
been at record levels, although net debt issuance had been broadly in line with previous years. Net
equity issuance had been much stronger than previously. The strength of net equity issuance would
support the process of corporate sector balance sheet deleveraging. Almost three quarters of listed
equity issues in 2009 had been for less than £5 million, suggesting that equity markets had offered an
alternative source of finance for smaller companies.
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mpc: 11 M4, adjusted to exclude the money holdings of institutions that intermediate funds between
banks, had increased by over £14 billion in November following a decline of nearly £10 billion in the
previous month. This turnaround largely reflected the activities of other non-bank financial
companies, such as pension funds and unit trusts. Those companies' activities were likely to continue
to inject considerable volatility into monthly M4 flows. The growth in households' and private
non-financial companies' money holdings had remained subdued. But it seemed increasingly likely
that non-financial companies' money holdings had troughed during the second half of 2008: the
annual growth rate in these balances had risen to nearly 5% in November.
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mpc: 10 It appeared that much of the narrowing in current account imbalances that had occurred in the
recent past reflected cyclical factors, and there was a risk that the ongoing recovery would lead to a
re-widening of global imbalances. If so, that could increase the risk of protectionist measures.
<h4>Money, credit, demand and output </h4>
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mpc: 9
The early stages of the global recovery had been less synchronised than the 2008 downturn had
been. China had grown rapidly, with broad money growth perhaps providing an early signal that
inflationary pressures were building. And there was strong activity growth in other emerging Asian
economies. Indicators of fourth-quarter activity in the United States had generally been encouraging
and there were signs that the housing market was stabilising. But, as in other countries, the recovery in
the United States had been spurred by significant policy stimulus, and its durability remained
uncertain. Recovery in parts of Europe remained weak, with headwinds from financial sector
deleveraging and stretched fiscal positions in some countries combining with the appreciation of the
euro to restrain activity.
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mpc: 8
Indicators suggested that global manufacturing, which had contracted severely during the
downturn, continued to recover. JPMorgan's global manufacturing Purchasing Managers' Index had
risen further to 55.0 in December, compared with a low of 33.9 a year earlier. To some extent that
rebound was likely to have reflected an unwinding of the stock cycle. The durability of the recovery in
manufacturing output would be a function of developments in final demand. There were some positive
indicators here too: global car sales had remained buoyant in November, despite the ending of some
car scrappage schemes; and retail sales reports in many countries pointed to rising consumer spending.
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mpc: 7
Data over the month remained consistent with a continued global recovery, albeit one that
remained heavily dependent on policy stimulus and subject to downside risks.
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mpc: 6
On an effective exchange rate basis, sterling was unchanged compared with a month earlier and
the dollar had appreciated by around 2%.
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mpc: <h4>The international economy </h4>
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mpc: 4
Equity prices had risen strongly on the month, with the major indices in the United Kingdom,
United States and euro area increasing by 4%-7%. These increases were also consistent with greater
confidence about the prospects for global recovery.
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mpc: 5
Dollar oil prices had risen by around 14% over the month, and were around 7% higher than the
assumption embodied in the November <i>Inflation Report</i>. This rise was likely to reflect the impact of
unusually cold weather in much of the northern hemisphere. Timely data suggested that total private
oil stocks in the United States had fallen during the month, but remained high by recent standards.
Political instability in a number of oil-producing areas might also have contributed to the rise in oil
prices.
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mpc: 3
Interest rates across the yield curve had risen internationally over the month. Short-term interest
rates one year ahead had risen in the United Kingdom, United States, and euro area, offsetting to
varying extents the falls that had occurred the month before. Longer-term government bond yields had
also risen internationally, with ten-year nominal spot rates on UK and US government debt increasing
by almost 40 basis points. Long-term real interest rates had also risen in the United Kingdom, albeit
from historically low levels. The rise in long-term interest rates could have reflected heightened
concerns about the scale of government debt issuance. It was also possible that short and long-term
rates had risen internationally as financial market participants had become more confident about the
prospects for global recovery.
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mpc:
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mpc: <h4>MINUTES OF THE MONETARY POLICY COMMITTEE MEETING HELD ON 6 AND 7 JANUARY 2010 </h4> 1
Before turning to its immediate policy decision, the Committee discussed financial market
developments; the international economy; money, credit, demand and output; and supply, costs and
prices.
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mpc: <h4>Financial markets </h4>
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mpc: 2
Financial market prices had been somewhat volatile over the month as thin trading volumes in
many markets over the year-end had accentuated some price movements.
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mpc: 39 The following members of the Committee were present: Mervyn King, Governor Charles Bean, Deputy Governor responsible for monetary policy Paul Tucker, Deputy Governor responsible for financial stability Kate Barker Spencer Dale Paul Fisher David Miles Adam Posen Andrew Sentance Dave Ramsden was present as the Treasury representative.<h4> </h4>
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mpc: </BODY>
</HTML>
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mpc: Bank Rate should be maintained at 0.5%;
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mpc: The Bank of England should maintain the stock of asset purchases financed by the issuance
of central bank reserves at £200 billion.
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mpc: The Committee voted unanimously in favour of the proposition.
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mpc: 36 The Committee would be able to provide further monetary stimulus should the outlook for
inflation in the medium term warrant it.
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mpc: 37 Taken together, all members felt that the arguments in favour of leaving the size of the asset
purchase programme unchanged at this meeting were more persuasive. But for some members, the
arguments were very finely balanced.
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mpc: 38 The Governor invited the Committee to vote on the proposition that:
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mpc: 35 In addition to those arguments, maintaining the current stance of monetary policy, without
adding further stimulus, would allow the Committee an opportunity to judge more thoroughly the
effects of the cumulative loosening of monetary policy that it had implemented since September 2008.
In particular, while Committee members agreed that the stock of past asset purchases would continue
to impart a significant monetary stimulus for some time, views differed about the precise duration and
size of that stimulus. It would also enable the Committee to assess the strength of the emerging
economic recovery as more reliable data became available.
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mpc: 34 But there were also arguments for leaving the scale of the asset purchase programme unchanged
at this meeting. The February projections did not imply an overwhelming risk of inflation being below
the target over the forecast period, and so did not suggest an immediate need for a further relaxation of
the policy stance. Indeed, given the exceptional degree of uncertainty over how the economy would
evolve, there was little merit in attempting to fine-tune monetary policy in the hope of achieving
comparatively small changes to the future path of inflation. Furthermore, CPI inflation was currently
above the target, and the near-term outlook was for it to increase further. Consequently, there was a
risk that inflation expectations might rise, and a possibility that expanding the size of the asset
purchase programme at this meeting might add to that. For some members, there also remained risks
that adding to the size of the asset purchase programme might increase the chance of unwarranted
increases in asset prices, and that attempting to eliminate the degree of spare capacity too rapidly
might eventually result in more inflationary pressure.
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mpc: 33 A case could be made for increasing the degree of monetary stimulus at this meeting. The
Committee's February<i> Inflation Report </i>projection, conditioned on Bank Rate following market yields,
indicated that CPI inflation was more likely than not to be below target for much of the three-year
forecast period if the asset purchase programme was maintained at its current size of £200 billion. An
expansion of the asset purchase facility could bring inflation back to target more quickly than
otherwise. That could also further attenuate, beyond the measures already taken, damage to the supply
capacity of the economy caused by the recession.
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mpc: 32 The evolution of the economy's supply potential was also uncertain. It was difficult to judge the
extent to which the financial crisis and ensuing recession had impaired the supply capacity of the
economy and how lasting that impairment might be. The sensitivity of inflation to the margin of spare
capacity during this recession might be low, because of both longer-term structural developments in
the economy since previous recessions and the impact of economic uncertainty on businesses' pricing
decisions.
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mpc: 31 Fundamentally, the economic outlook had changed little over the past few months. The
medium-term headwinds to economic activity remained considerable. Although credit conditions
appeared to have begun a slow process of normalisation, they would be likely to remain tight for some
time. Meanwhile, the need to strengthen public and private sector balance sheets would weigh on
spending. Opposing those headwinds was the stimulus from exceptionally accommodative monetary
policy, and the past depreciation of sterling. The interaction of those opposing forces implied
significant uncertainty over the outlook for demand. The stabilisation of labour and asset markets, as
well as of confidence indicators, suggested to the Committee that the likelihood of the worst downside
risks had diminished.
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mpc: 30 Economic activity was recovering, but only weakly. The monetary and real GDP data had been
disappointing, although the latter might be understating the true pace of the economic recovery. But
there were some positive indicators, too. While based on uncertain data, nominal demand was
estimated to have recovered in the third quarter, the labour market was stabilising, and there was some
survey evidence of a pickup in business and consumer confidence. Retail sales, car registrations and
the housing market also pointed to a resumption of household spending and a recovery in confidence.
And the global economy was continuing to recover, albeit less markedly in some of the United
Kingdom's main trading partners than elsewhere.
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mpc: <h4>The immediate policy decision </h4>
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mpc: 29 During the month, the Bank had completed the MPC's programme for purchases of £200 billion
of assets financed by the issuance of central bank reserves. That stock of past asset purchases would
continue to impart a substantial degree of monetary stimulus for some time to come. The completion
of the previously announced purchase programme had resulted in little immediate impact on market
yields, consistent with the fact that market participants almost uniformly expected the size of the asset
purchase programme to be left unchanged at this MPC meeting.
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mpc: 28 On balance, the Committee judged that, conditional on the assumption that Bank Rate followed a
path implied by market interest rates and the stock of purchased assets financed by the issuance of
central bank reserves remained at £200 billion throughout the forecast period, it was more likely than
not that inflation would be below the target for much of the forecast period, but the risks were broadly
balanced around the target by the end.
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mpc: 27 The extent to which CPI was expected to deviate from the 2% target in the medium term was
highly uncertain. It would depend in part on: the timing and strength of the recovery in demand; how
much further prices needed to adjust to the past depreciation of sterling; the degree to which supply
capacity would be eroded by the recession; and the sensitivity of inflation to spare capacity in the
medium term. The risks around the most likely path for inflation were judged to lie to the upside,
reflecting the possibility of further increases in commodity prices, and the risk that a sustained period
of above-target inflation might cause inflation expectations to rise. But there were also risks that
inflation could stay below the target for longer than on the most likely path.
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mpc: 25 Output was likely to remain substantially below the level consistent with its pre-crisis trend for a
considerable period. In large part that reflected the impact of the downturn on the supply capacity of
the economy. But output was also judged likely to remain some way below capacity throughout the
forecast period.
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mpc: 26 CPI inflation was likely to remain significantly above the 2% target in the near term, reflecting
the continuing impact of sterling's depreciation and the restoration of the standard rate of VAT to
17.5% in January. The outlook for inflation was somewhat higher in the near term than in the
Committee's November forecast. Inflation was then likely to fall back to below the target for a period,
as the margin of spare capacity exerted increasing downward pressure on prices, and the effects of
sterling's depreciation and higher VAT waned.
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mpc: 24 The Committee judged that the balance between those substantial forces pointed to a gradual
recovery in the level of economic activity. Overall, the projected distribution for growth was similar to
that presented in the November 2009 <i>Inflation Report</i>. As in November, it was more likely than not
that growth would be above its historical average in 2011 and 2012. While the most likely path for
growth was somewhat weaker, some of the downside risks were judged to be smaller than in
November.
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mpc: 23 The Committee reached its policy decision in the light of its projections to be published in the
<i>Inflation Report</i> on Wednesday 10 February. Activity would be underpinned over the forecast period
by the considerable stimulus from the easing in monetary policy, and supported by global growth and
the past depreciation of sterling. But the economy would face major headwinds. It was likely that
credit conditions would remain restrictive for some time and that the need to strengthen public and
private sector finances would weigh on spending.
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mpc: 22 Evidence on the degree of near-term inflationary pressure was mixed. Twelve-month producer
output price inflation, which tended to lead consumer goods price inflation, had increased to 3.5% in
December, from 2.9% in November. But private sector earnings growth remained exceptionally weak.
According to the average weekly earnings data, private sector regular pay was virtually unchanged in
the three months to November compared with a year earlier. And a survey by the Bank's Agents
indicated that pay settlements were likely to remain unusually low. The Agents' pay surveys had been
useful indicators of wage pressures in the recent past. Indicators of pricing pressure from the business
surveys also remained subdued.
<h4>The February GDP growth and inflation projections </h4>
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mpc: 21 The Committee also considered the possibility that the degree of spare capacity was influenced
by businesses' expectations of, or uncertainty over, future demand growth. In order to protect their
profit margins in the short term, some companies may have made temporary changes to the scale of
their operations. If demand picked up sustainably in the near term, then currently under-utilised staff
and production lines could be quickly re-employed, limiting any resulting upward pressure on prices.
Absent such a pickup, those reductions in the scale of businesses operations might become permanent,
resulting in capital scrapping, commensurately higher unemployment and the associated loss of
workers' skills and labour market attachment. In that case, such a loss of productive capacity might
act to moderate the downward pressure on prices that would result from the weaker demand
environment.
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mpc: 20 There were probably some factors that had moderated companies' willingness to lower prices in
order to boost sales, reducing the impact of a given degree of spare capacity on inflation. In the light
of credit constraints and uncertain future revenues, some companies may have been reluctant to cut
prices in order to protect their near-term cash flows. And, for some companies, the combination of the
sharp reduction in global trade over the past 18 months and the depreciation of sterling may have
reduced competitive pressures. This, or other factors, may have lengthened the lag between the
emergence of spare capacity and its impact on companies' pricing behaviour. If that were the case,
inflation might be expected to fall back reasonably sharply in the medium term.
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mpc: 19 Excluding food and energy prices, and abstracting from the effects of changes to the VAT rate,
CPI inflation had been broadly stable since the beginning of 2009. That was most likely because the
upward pressure on firms' imported costs and prices from sterling's depreciation had acted to
counterbalance the downward pressure on inflation from the margin of spare capacity. But it was
difficult to judge the size of the impact of each of those two forces. Other advanced economies,
including those that had not experienced significant currency depreciations, had also seen inflation
hold steadier than might have been expected given the reduction in activity. This suggested that there
might be other common factors helping to offset the downward impetus to inflation from weak
demand. A smaller effect of a given change in demand on inflation had been observed across the
major economies even prior to the crisis.
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mpc: 18 Against the background of a substantial, and growing, margin of spare capacity, it was notable
that CPI inflation outturns had tended to surprise to the upside during the past year. CPI inflation had
increased by 1 percentage point to 2.9% in December chiefly the result of higher petrol price
inflation and the effects of the reduction in the standard rate of VAT a year earlier dropping out of the
twelve-month comparison. It was likely that inflation had risen further in January, as the standard rate
of VAT had been restored to 17.5%. Inflation was likely to remain above the target for some months
at a time when monetary policy was exceptionally accommodative. There was a risk that this might
cause inflation expectations to rise. Survey measures of inflation expectations had so far moved little,
however. The Citigroup/YouGov survey measures of households' near and medium-term inflation
expectations had ticked up in January. But they remained well below the levels seen during 2008,
when energy prices caused CPI inflation to rise sharply above the target.
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mpc: 17 According to the LFS measure, employment had fallen by 14,000 in the three months to
November compared with the previous non-overlapping quarter. The unemployment rate had
remained stable at 7.8%. As in previous months, the aggregate change in employment masked a larger
fall in the number of full-time jobs, partly offset by an increase in part-time working. But the pace at
which full-time employment was falling had been moderating since the summer of 2009. And the rate
at which unemployed workers were finding employment had picked up. Overall, the employment data
remained more resilient than might have been expected given the scale of the decline in recorded GDP.
In addition, the corporate liquidation rate had been low relative to the fall in aggregate activity. And
monthly data suggested that the level of corporate liquidations may have fallen back in the second half
of 2009.
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mpc: 16 Developments in the export and manufacturing sectors were a fourth potential explanation for
the relative sluggishness of recent activity in the United Kingdom. A notable feature of the global
recovery had been substantial increases in world trade and manufacturing output. But the level of UK
manufacturing output had been broadly unchanged since the beginning of 2009, and export volumes
had seemingly not yet been significantly boosted by sterling's depreciation. The latest survey data
indicated that businesses' export orders and optimism had recovered recently, so it was possible that
some revival of exports and manufacturing output was in prospect. But there was a risk that export
growth might be restrained if the same headwinds that were buffeting the UK economy limited growth
in the United Kingdom's major trading partners. It was also possible that the demand for some UK
exports, for instance of financial services, would not recover for some time. Separately, the weakness
of net trade so far partly reflected the limited degree of expenditure switching towards domestically
produced goods and services by UK consumers and businesses in response to sterling's depreciation.
<h4>Supply, costs and prices </h4>
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mpc: 15 Third, it was possible that businesses and households had temporarily delayed spending and
increased saving in response to the high degree of current economic uncertainty. If that were the case,
then spending might accelerate over time as economic uncertainty lessened and confidence returned.
Having fallen dramatically during 2008, survey measures of consumer confidence had begun to
normalise.
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mpc: 14 Second, the headwinds facing the economy might have been more powerful than previously
assumed. Credit conditions had remained tight, and bank lending weak. A desire to strengthen
household balance sheet positions may have restrained consumer spending. If these were the sources
of weakness in spending, then that weakness would likely persist for some time. The recent recovery
in the housing market, however, might indicate that households' concerns over the strength of their
balance sheets were diminishing. According to the latest data, the average of the lenders' house price
indices had increased by 0.9% in January and by 10% since the trough in April 2009.
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mpc: 13 According to the preliminary estimate, real GDP had increased by 0.1% in the fourth quarter.
That was weaker than the Committee's central expectation at the time of the November 2009 <i>Inflation </i>
<i>Report</i>. There were several potential explanations for the apparent sluggishness of the recovery in the
second half of 2009. First, although the ONS estimates were the single best source of information, it
was nonetheless possible that output had expanded somewhat more rapidly than the current vintage of
the official data had suggested. That would be consistent with the more positive signals from some
business surveys, the relative resilience of the labour market, and evidence of a recovery in retail
spending, car registrations and the housing market.
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mpc: 12 The latest data for 2009 Q3 indicated that nominal GDP had begun to expand again, at a
quarterly pace of 1.1%. Taken at face value, these data were promising given that the objective of the
accommodative stance of monetary policy, including the MPC's asset purchase programme, was to
increase nominal demand sufficiently to meet the inflation target. It was, however, possible that the
increase in nominal demand was being absorbed by higher prices, and lower real output, than the
Committee had anticipated.
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mpc: <h4>Money, credit, demand and output </h4>
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mpc: 11 M4, excluding the money holdings of institutions that intermediate funds between banks, had
remained weak in December: the three-month annualised growth rate stood at -0.5%. As in recent
months, that weakness had been concentrated in the money holdings of other non-bank financial
companies primarily institutional investors and securities dealers. That may in part have reflected
the impact on their monetary holdings of purchases of banking sector long-term debt and equity
securities.<h4> </h4>By contrast, the three-month annualised growth of non-financial companies' money
holdings remained above 6%. That might indicate improved prospects for business spending over the
coming quarters.
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mpc: 10 Excluding the effects of movements in volatile energy and food prices, consumer price inflation
had fallen by just over half a percentage point in both the United States and euro area over the past 18
months. The recent decline in Japanese inflation had been more pronounced, likely reflecting the
impact of the appreciation of the yen. These declines in inflation had appeared modest by comparison
with the sizable reductions in output that had occurred around the world, and the margin of spare
economic capacity that implied.
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mpc: 9
The euro-area recovery had remained more subdued, with the manufacturing PMIs providing a
reminder of the varied prospects for different countries within the area: the index levels in Germany,
France and Italy had risen further above 50, indicating economic expansion, but continued to point to
falling activity in Greece, Ireland, and Spain. While the fiscal position in Greece did not appear to be a
direct concern for the United Kingdom, it had the potential to trigger problems in some other countries
and to damage a still fragile banking sector.
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mpc: 8
In the United States, the recent strength of manufacturing output growth was reflected in the
GDP data for the fourth quarter of 2009: GDP was estimated to have grown by 1.4%, with a sizable
boost from a reduction in the pace of de-stocking. Final domestic demand had also grown, and
included a pickup in non-residential investment.
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mpc: 7
Activity in emerging Asia had led the ongoing global recovery. In China, GDP in the fourth
quarter of 2009 was estimated to have grown by 10.7% compared with a year earlier. Although
official estimates of quarterly growth rates were not available, that probably implied a similar pace of
quarterly expansion as in the third quarter.
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mpc: <h4>The international economy </h4>
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mpc: 6
Indicators during the month had generally pointed to a further strengthening of global activity,
particularly in the manufacturing sector, in which the post-crisis fall in global output had been
concentrated. According to the World Bank, global industrial production had increased at an
annualised pace of more than 12% in the third quarter of 2009. The JP Morgan global manufacturing
purchasing managers' index (PMI) rose a further 1.5 points in January, to 56.1, consistent with
reasonably brisk output growth at the turn of the year. And the Netherlands Bureau for Economic
Policy Analysis measure of world goods trade had increased in November for the third consecutive
month.
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mpc: 5
By contrast, sterling corporate bond prices had risen during the month, with spreads over
government bond yields narrowing further. UK corporate bond issuance had been strong in January.
And there had been some positive news on bank funding conditions: January had seen record levels of
issuance of unguaranteed and unsecured senior UK bank debt, and there had been another issue by a
UK bank of a residential mortgage-backed security to private markets. Nonetheless, banks continued
to face a significant challenge in replacing funding that matured over the next few years, including that
supported by the official sector. Market intelligence indicated that strong cash inflows combined with
low official interest rates may have led some asset managers to seek out higher yielding investments in
recent months.
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mpc: 4
Equity prices had fallen internationally, although those movements had been small by
comparison with the considerable increase in prices since their March 2009 troughs. It was possible
that market participants had focused on the potential for Asian activity to be restrained by policy
tightening following the increase in banks' reserve requirements in China. Consistent with that,
commodity prices had also fallen during the month: industrial metals prices had declined by almost
15% and the Brent oil price by around 8% in dollar terms. Another possible trigger was the
announcements by US authorities about possible regulatory reform.
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mpc: 3
Yields had also fallen in the United States and on some euro-area government bonds. But the
variation in yields on government debt across countries within the euro area had increased, reflecting
ongoing concerns about the fiscal positions in some euro-area countries, particularly Greece. Those
concerns appeared to have contributed to a generalised depreciation of the euro: its effective exchange
rate index (ERI) had fallen over 2½% on the month. As a consequence, the sterling ERI had
appreciated slightly.
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mpc: <h4>Financial markets </h4>
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mpc: 2
Weaker-than-expected macroeconomic data, including the preliminary release of UK GDP for
the fourth quarter of 2009, had contributed to a decline in near-term sterling interest rate expectations
over the month. Overnight index swap (OIS) rates twelve months ahead had fallen by around 25 basis
points since the previous MPC meeting, and by almost 40 basis points since the Committee's
November 2009 <i>Inflation Report </i>projections had been finalised. Medium and longer-term interest
rates had also fallen slightly, partly unwinding the increases seen in previous months.
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mpc:
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mpc: <h4>MINUTES OF THE MONETARY POLICY COMMITTEE MEETING HELD ON 3 AND 4 FEBRUARY 2010 </h4> 1
Before turning to its immediate policy decision, and against the background of its latest
projections for output and inflation, the Committee discussed financial market developments; the
international economy; money, credit, demand and output; and supply, costs and prices.
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mpc: 46 The following members of the Committee were present: Mervyn King, Governor Charles Bean, Deputy Governor responsible for monetary policy Paul Tucker, Deputy Governor responsible for financial stability Kate Barker Tim Besley David Blanchflower Spencer Dale Paul Fisher Andrew Sentance Dave Ramsden was present as the Treasury representative.<h4> </h4>
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mpc: The Committee voted unanimously in favour of the proposition.
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mpc: The Bank of England should finance £75 billion of asset purchases by the creation of
central bank reserves. The Bank should seek to make these purchases within the next
three months. The scale and timing of purchases would be reviewed at each MPC
meeting.
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mpc: Purchases of private sector assets under the Asset Purchase Facility should now be
financed using central bank reserves rather than Treasury Bills.
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mpc: The Committee noted that, in so far as purchases of private sector assets fell short of the
£75 billion target, the Bank of England would buy gilts to fulfil the overall quantity of
purchases.
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mpc: 44 The Governor invited the Committee to vote on the proposition that Bank Rate should be
reduced by 50 basis points to 0.5%. The Committee voted unanimously in favour of the proposition.
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mpc: 45 The Governor invited the Committee to vote on the proposition that:
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mpc: 43 Finally, the Committee discussed the time frame over which the Bank should aim to complete
the asset purchases, and recognised that, given the large scale of asset purchases, it was likely to take
more than a month for the Bank to complete the programme. The Committee agreed that it should set
a period of three months over which the Bank should aim to purchase the assets. The Committee
would review the appropriate scale of the programme each month.
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mpc: 42 The Committee noted that these asset purchases were likely to be most effective if they were
purchased from the domestic non-bank financial sector rather than from banks. Domestic non-bank
institutions were likely to use some of the proceeds from asset sales to buy other assets. The
Committee noted that this preference for buying assets from institutions other than banks meant that
the Bank would focus its purchases on medium and long maturities, because short-maturity gilts were
more likely to be held by banks and overseas central banks. The Bank would also avoid the purchase
of very long maturity gilts, given the structure of supply and demand in those markets, and in
particular the demand from some institutions such as pension funds to hold those instruments to hedge
their liabilities.
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mpc: 40 There was a range of views about the desirable size of the initial programme of asset purchases.
But Committee members agreed that the differences between their preferred scale of purchases were
small relative to the degree of uncertainty surrounding these estimates. On balance, the Committee
judged that an initial programme of asset purchases of £75 billion was appropriate.
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mpc: 41 Turning to the type of assets which the Bank should purchase, the Committee agreed on the
importance of improving conditions in corporate credit markets. The Committee noted that the Bank
would continue with its purchases of private sector assets in order to improve directly the functioning
of corporate credit markets. The Committee agreed that these purchases should now be financed
through the creation of central bank reserves, rather than through the issuance of Treasury Bills.
However, it was likely that the purchases of private sector assets over the coming months would be
significantly less than the £75 billion target for overall purchases. In part that was because the size of
those private sector asset markets was relatively small. But in addition, the first objective of those
purchases was to reduce spreads and to improve the flow of credit. As such, the scale of purchases by
the Bank in those markets was not the primary objective. Given these considerations, the Bank would
also need to buy substantial quantities of conventional gilts in the secondary market in order to meet
the Committee's objective for overall asset purchases.
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mpc: 39 Turning to the policy decision, the Committee judged that a further reduction in Bank Rate, of
0.5 percentage points, was appropriate. In coming to that judgement, the Committee noted the changes
the Bank's Executive would make to the operation of the Bank's Sterling Monetary Framework, which
would be set out in a Market Notice to be published later that day. In particular, the rate paid on the
Operational Standing Deposit Facility would be reduced from 0.75% to 0%. Consequently, these
changes alone would mean that overnight market interest rates would be likely to trade in the range
between zero and 0.5%, the new level of Bank Rate.
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mpc: 38 In addition, should the first injection prove too small, there was a risk that observers would
wrongly infer that such asset purchases were not an effective policy tool. That might dampen the
extent to which liquidity premia were reduced, and asset prices boosted, by further purchases. The
initial programme of asset purchases needed to be on a scale large enough to demonstrate that the
Committee would do whatever was needed to boost nominal spending sufficiently to keep inflation at
target in the medium term.
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mpc: 37 There were also arguments in favour of a programme of purchases towards the upper end of the
range. The risks around the inflation outlook were weighted to the downside. As such the costs of
doing too little at the start were arguably greater than the costs of doing too much. If the purchases
proved too expansionary, the Bank would be able to reduce the degree of stimulus, either by selling
back some of the assets, or by raising the level of Bank Rate.
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mpc: 36 Within that range, the Committee discussed the arguments supporting smaller or larger
programmes of asset purchases. One factor supporting a figure towards the lower end of that range
was the high degree of uncertainty over the precise impacts on nominal spending and inflation of these
operations. That might suggest that the Committee should move relatively slowly, while it learnt more
about the impact of those operations. Although it would take many months before the full effects
became apparent, some indicators would emerge more quickly than that. For example, the Committee
would be able to gather some information on how the sellers of the assets were responding to the
subsequent increase in liquidity of their portfolios, and would also be able to monitor movements in
asset prices.
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mpc: 35 These considerations suggested that the increase in the level of money balances should be of a
similar magnitude to the required increase in nominal GDP. The Committee agreed that reserves
should initially be increased by a figure somewhere in the range of £50 billion to £100 billion.
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mpc: 34 A significant programme of asset purchases was likely to be necessary in order to make up this
shortfall in nominal spending. The current strains in the financial system, and in particular the
pressures on banks to reduce the size of their balance sheets, meant banks were less likely to increase
their lending substantially following an increase in their reserves. That would reduce the extent to
which a given increase in banks' reserves would generate a correspondingly larger rise in the stock of
broad money and credit. It was also possible that the eventual increase in nominal spending might be
somewhat smaller than the increase in the stock of broad money resulting from the asset purchases.
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mpc: 32 In addition, to the extent that some of the extra reserves were used to finance the Bank's
programme of private sector asset purchases aimed at improving the functioning of corporate credit
markets, that should make it easier for some types of companies to raise finance, reducing their
reliance on the banking sector.
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mpc: 33 There was a high degree of uncertainty over the appropriate scale of purchases necessary to keep
inflation at target in the medium term. The Committee noted that their February <i>Inflation Report</i>
projections suggested that a significant shortfall in nominal GDP was possible over the forecast period.
Nominal GDP had grown by, on average, around 5% since the inception of the MPC a period over
which inflation had been close to the target on average. In contrast the Committee's February
projections implied a small decline in nominal GDP in 2009, with growth remaining below 5% in
2010. Therefore the projections suggested a shortfall in nominal GDP of at least 5%.
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mpc: 31 By increasing the supply of money in the economy, these operations should, over time, cause
nominal spending to rise. Sellers of assets to the Bank would find that their portfolios were now more
heavily weighted towards highly liquid, low-yielding assets. To rebalance their portfolios, they would
be likely to spend some or all of the proceeds buying other types of asset. This would tend to increase
the relative prices of those assets, and hence wealth, and would, by stimulating the demand for
corporate credit instruments, improve the supply of funds to the corporate sector. The purchases
would also mean that the banking system would be holding a higher level of reserves in aggregate,
which might cause it to increase its lending to companies and households. There could also be positive
impacts on expectations and confidence from these operations to increase the money supply, as
businesses and individuals became more confident about an eventual recovery.
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mpc: 30 The Committee agreed that such purchases were necessary in order to increase nominal spending
growth to a rate consistent with meeting the inflation target in the medium term. Such operations were
a natural extension of the Committee's usual monetary policy operations. Given the Bank's role as
monopoly supplier of sterling central bank money, the Committee had previously chosen to influence
the amount of nominal spending in the economy by varying the price at which it supplied central bank
money in exchange for assets held by the private sector. Under the operations now under
consideration, the Committee would instead be focusing more directly on the quantity of money it
supplied in exchange for assets held by the private sector.
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mpc: 29 The Committee then discussed what further measures it should take to ease the stance of
monetary policy. The Committee noted the recent exchange of letters between the Governor and the
Chancellor of the Exchequer, in which the Chancellor had authorised the Committee to use the Asset
Purchase Facility to purchase up to £150 billion of assets, financed by the issuance of central bank
reserves, should the Committee choose to do so for monetary policy purposes. Within that total, up to
£50 billion could be in purchases of eligible private sector assets, with the remainder to be made up of
purchases of UK government debt in the secondary market.
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mpc: 28 However, there were also arguments in favour of making a further reduction in Bank Rate. First,
a cut in interest rates would still have some effects in boosting nominal spending and inflation, for
example through the usual exchange rate and asset price channels. Second, a lower level of Bank Rate
should increase the effectiveness of the further measures which were likely to be needed to ease the
stance of monetary policy. Those measures would lead to an increase in the supply of money in the
economy. A lower level of Bank Rate would raise the incentive for investors to find alternative assets
to hold, rather than keeping the additional money in bank deposits. Third, concerns about the impact
of a low Bank Rate on lending capacity were best met by policy initiatives to stabilise the financial
system.
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mpc: 27 The Committee agreed that further monetary easing was required to meet the inflation target, and
first discussed whether there should be any additional cuts in Bank Rate. Some arguments were
identified for making no further rate reductions. Although the current extremely low level of Bank
Rate was providing a substantial stimulus to the economy, the transmission of any further rate cuts
through to activity and inflation was likely to be significantly impaired. In particular, the Committee
remained concerned that a further reduction could have some adverse impacts on the economy, given
its effects on the profits that banks and building societies were able to make through the spread
between their deposit and lending rates. Deposit rates could not be reduced much further, and if these
institutions were contractually obliged to pass on cuts in Bank Rate to some of their borrowers, that
would squeeze their profits further, and potentially reduce lending capacity. In addition, a sustained
period of very low interest rates could impair the functioning of money markets, creating difficulties in
the future, when interest rates needed to rise.
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mpc: 26 The current and prospective weakness in nominal demand growth meant that there remained a
substantial risk that inflation would undershoot the target in the medium term. CPI inflation had fallen
slightly, to 3.0% in January, and the Committee expected further falls over the coming months, as the
contributions from energy and food prices declined, and spare capacity pushed down on wages and
companies' margins. These effects would only be partly offset by the impact of higher import prices
following the substantial depreciation of sterling over the previous 18 months.
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mpc: 25 Data on the UK economy had been consistent with the broad shape of the central projection for
activity that the Committee had published in February. The data pointed to a sharp fall in output in the
fourth quarter of 2008, and to a similar contraction in the first quarter of 2009. And evidence on
lending suggested that credit conditions remained tight for businesses and households. But there were
some signs that the economy remained on track for an easing in the rate of contraction in output over
the rest of 2009. Cutbacks in output which companies had undertaken in order to reduce stock levels
did seem to have been responsible for some of the severity of the fall in GDP in the fourth quarter.
There was evidence that the depreciation of sterling was causing some switching of domestic spending
from imported to domestically produced goods and services. House prices continued to fall, but
housing market activity, though very subdued, appeared no longer to be weakening further. However
even if GDP growth rates were recovering by the end of 2009, this was likely to be taking place
against a backdrop of a significant degree of spare capacity, and in particular a high and rising level of
unemployment.
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mpc: 24 Activity data for the world economy had continued to be weak. Monthly indicators were
consistent with a further substantial contraction of global output in the first quarter of 2009. There had
been further measures announced by fiscal and monetary authorities in some large economies which
should help to limit the downside risks to global output, and support growth. But the weakness of
world demand continued to pose downside risks to the outlook for UK activity and inflation.
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mpc: <h4>The immediate policy decision </h4>
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mpc: 23 Survey measures of near-term inflation expectations appeared to be at levels roughly consistent
with inflation meeting the target. The Bank/GfK NOP survey measure of expected inflation over the
next twelve months had continued to fall back from its elevated levels in mid-2008, and was now
slightly below its average level since the survey began in 1999. The corresponding Citigroup/YouGov
survey had picked up further from its recent trough.
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mpc: 22 CPI inflation had fallen slightly, to 3.0% in January from 3.1% in December, much as the
Committee had expected at the time of the February <i>Inflation Report</i>. However, it remained
significantly above the 2% target. In part that reflected the continuing impact of past increases in
energy and food prices. The lower level of the sterling exchange rate was pushing up energy and food
prices, and over time would put upwards pressure on the prices of other imported goods and services.
If the current level of the exchange rate persisted, then there would be a positive impact on the price
level. But it was uncertain how quickly this would feed through, and so how much it would add to
annual consumer price inflation. Offsetting this effect, there were likely to be significant downward
pressures on inflation from the growing level of spare capacity in the economy. That was consistent
with the results of a special survey on cost pass-through by the Bank's regional Agents, in which,
despite the lower level of sterling, many respondents had reported that their variable costs had fallen
over the previous six months.
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mpc: 21 The worsening in labour market conditions posed a downside risk to activity, particularly to the
extent that it fed back into households' confidence and willingness to spend. However, the
implications for the outlook might be ameliorated somewhat, to the extent that lower settlements
reflected increased wage flexibility, dampening the falls in employment.
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mpc: <h4>Costs and prices </h4>
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mpc: 20 Conditions in the labour market had continued to deteriorate. Employment had fallen by 45,000
in 2008 Q4, and unemployment, according to the Labour Force Survey measure, had risen by 146,000.
Most survey measures of employment intentions had continued to fall. Measures of earnings growth
had been broadly stable, but it was likely that earnings would weaken over the first half of 2009,
reflecting both lower bonuses and falling settlements. There had been a sizeable pickup in the
proportion of companies reporting wage freezes in the January settlements data. That was broadly
consistent with reports from the Bank's regional Agents.
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mpc: 18 The news from the surveys for output in the first quarter of 2009 was mixed. The CIPS/Markit
output balance for the manufacturing sector had fallen back sharply in February and was at its lowest
level since the survey began in 1991. The survey implied a further very significant fall in
manufacturing output in the first quarter. In contrast the CIPS/Markit services balance had edged up
for the third successive month, although it remained significantly below its series average.
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mpc: 19 Overall, the output surveys continued to point to a broadly similar rate of contraction in output in
the first quarter of 2009 to that in the fourth quarter of 2008. To be consistent with the easing in the
pace of contraction implied by the February <i>Inflation Report </i>central projection, the surveys would
need to rise quite significantly over the coming months. The risks to the February central projection
remained weighted to the downside.
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mpc: 17 The outlook for business investment remained very subdued. In the three months to January, M4
lending to non-financial companies, excluding the effects of securitisations, had grown by only 1.1%
on an annualised basis. And construction orders for new commercial property had fallen very sharply
in the fourth quarter, to 40% below their level a year earlier.
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mpc: 16 There had also been some tentative evidence that activity in the housing market might be
beginning to stabilise. A preview of the February Royal Institution of Chartered Surveyors survey had
shown modest improvements across most indicators. And according to the Bank's regional Agents,
reports of growth in the numbers of enquiries and viewings had become considerably more
widespread. But housing market turnover remained exceptionally low, and house prices had fallen by
4.3% in the three months to February, according to the average of the main lenders' indices.
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mpc: 15 The news on the month for domestic expenditure in Q1 was mixed. There had been some
positive news for household spending. ONS data suggested that nominal retail sales had picked up
sharply on the month in January, and had grown by 2.4% on a year earlier. Retail sales volumes were
reported to have grown by 3.6% in the year to January, although it was likely that that growth rate
would be revised down when the weights underlying the retail sales deflator were updated. Although
the CBI <i>Distributive Trades Survey</i> pointed to weaker retail sales growth than suggested by the ONS
data in January, the responses to the latest survey were consistent with a pickup in twelve-month sales
growth in February.
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mpc: 14 Partly offsetting the drag from de-stocking, GDP was estimated to have been supported in the
fourth quarter by a positive contribution from net trade. This support was not due to exports, which
had fallen by 5.3%. Rather, net trade had boosted UK growth because of a sharp fall in UK imports, of
5.7% - the largest quarterly decline since 1980. It was likely that the depreciation of sterling had
encouraged a switch in spending away from imported goods and services and towards domestically
produced output.
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mpc: 13 The expenditure breakdown of real GDP growth in Q4 had been broadly in line with the
Committee's expectations. However, de-stocking was estimated to have made an even larger
contribution to the decline in output than the Committee had anticipated, accounting for almost two
thirds of the entire fall. The Committee recognised that data on stockbuilding were prone to revision.
But these data appeared to chime with evidence from business surveys, that businesses had reacted to a
weakening in demand and tighter credit conditions by cutting back on stocks. The data provided some
support for the Committee's central projection, in the February <i>Inflation Report</i>, of a partial recovery
in growth rates over 2009 as the negative contribution to growth from de-stocking lessened.
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mpc: 12 UK nominal GDP had fallen by 0.8% in 2008 Q4, and was only 0.5% higher than its level a year
earlier. If unrevised, this would be the weakest four-quarter growth in nominal output since quarterly
data began in 1956. Broad money (M4) had continued to grow strongly in the three months to
January. However those high rates of growth were largely explained by the behaviour of the non-bank
financial sector, and within that sector by increases in intermediation between banks and financial
companies belonging to the same banking group. Those large flows were likely to have limited
implications for asset prices and money spending. The stock of broad money excluding holdings by
non-bank financial corporations had grown by 2.7% on a year earlier in January. This compared with
a ten-year average annual growth rate of 7.6%.
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mpc: <h4>Money, credit, demand and output </h4>
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mpc: 10 Over the past month, economic and financial conditions in a number of central and eastern
European countries had deteriorated, and there were also concerns about the potential exposure of
some western European banks to those countries. Although the direct exposure of the UK economy
and banking system to those economies was not large, some of the United Kingdom's trading partners
could be more heavily affected.
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mpc: 11 There had been a number of policy developments during the month. The US economic stimulus
act had been passed into law, and the US government had announced a new Financial Stability Plan,
and a plan to improve conditions in the housing market. The Bank of Japan had announced plans to
restart purchases of equities held by banks, to extend its purchases of commercial paper, and to buy
highly-rated, short-maturity corporate bonds.
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mpc: 8
Output was also estimated to have fallen sharply in the United Kingdom's two largest export
markets. US output had been revised down, and was estimated to have fallen by 1.6% in the fourth
quarter, in part due to a weaker contribution from stockbuilding than previously estimated. Euro-area
output was estimated to have contracted by 1.5% in Q4. The largest decline had been recorded in
Germany, driven by a 7% fall in exports.
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mpc: 9
Turning to the evidence on global growth in the early months of 2009, the signals provided by
Purchasing Managers' Indices (PMIs) had been mixed, following a pickup in many of those indices in
January. The JP Morgan Global Purchasing Manager Index for manufacturing had risen slightly in
February, with rises recorded in both the US and Chinese indices, although they remained at low levels
compared with their historical averages. But the equivalent Global Services Index had fallen in
February. Both the US non-manufacturing PMI and the euro-area services PMI had declined on the
month.
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mpc: <h4>The international economy </h4>
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mpc: 7
The data released over the month had confirmed that output had weakened considerably across a
wide range of economies in 2008 Q4. Among the major industrialised economies, Japan had seen the
largest contraction in output, with GDP falling by 3.3% - the second largest quarterly decline on
record. That weakness had been driven by a sharp decline in exports. A number of other Asian
economies had also released data showing particularly large falls in industrial production, output and
trade flows.
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mpc: 5
Equity prices had fallen internationally on the month. The FTSE All-Share index had fallen by
around 15%, to its lowest level since 2003. Declines in financial sector equity prices had been
particularly large, but equity prices across the other main sectors had also fallen. That suggested that
the declines partly reflected a weaker or more uncertain macroeconomic outlook, rather than simply
increased concerns about the financial sector.
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mpc: 6
Market expectations of Bank Rate had fallen on the month and a reduction of 50 basis points was
expected at the Committee's March meeting. Short to medium term nominal forward rates had also
fallen, by as much as 45 basis points. It was likely that this, in part, reflected increased expectations of
gilt purchases for monetary policy purposes. The sterling ERI was little changed on the month,
although this masked some significant bilateral exchange rate movements. The yen had depreciated
sharply against sterling and a range of currencies, following weaker than expected Japanese
macroeconomic data. But sterling had weakened somewhat against the dollar.
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mpc: 4
The spreads between sterling LIBOR rates and expected policy rates had widened on the month,
and the equivalent three-month forward spread had also risen. Those increases in current and forward
spreads largely reflected falls in expected policy rates, rather than increases in LIBOR. There was
often some lag between movements in expected policy rates and the corresponding changes in LIBOR
rates, but those lags were usually a few days, rather than weeks. Moreover, market contacts had
reported that inter-bank term lending had reduced over recent weeks.
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mpc: 3
Details of the terms under which the Royal Bank of Scotland (RBS) would be able to access the
Government's Asset Protection Scheme had been made public, and the RBS equity price had risen on
the day of the announcement. However, towards the end of February there had been some
deterioration in sentiment towards UK and overseas banks. Banks' CDS spreads had picked up, and
financial sector corporate bond spreads had widened.
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mpc: <h4>Financial markets </h4>
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mpc: 2
Developments on the month in financial markets had been mixed. The introduction of the Asset
Purchase Facility (APF), under which the Bank had so far purchased around £1 billion of corporate
commercial paper, had been well received by the market. A number of other assets, including
investment-grade corporate bonds, were also eligible for purchase under the APF. Although no
purchases had yet taken place, there had been some reduction in the spreads between non-financial
corporate bonds and equivalent Credit Default Swaps (CDS), suggesting improvements in liquidity in
those bond markets.
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mpc:
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mpc: <h4>MINUTES OF THE MONETARY POLICY COMMITTEE MEETING HELD ON 4-5 MARCH 2009 </h4> 1
Before turning to its immediate policy decision, the Committee discussed financial markets
developments; the international economy; money, credit, demand and output; and costs and prices.
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mpc: 34 The following members of the Committee were present: Mervyn King, Governor Charles Bean, Deputy Governor responsible for monetary policy John Gieve, Deputy Governor responsible for financial stability Kate Barker Tim Besley David Blanchflower Spencer Dale Andrew Sentance Paul Tucker Nicholas Macpherson was present as the Treasury representative.<h4> </h4>
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mpc: 33 The Governor invited the Committee to vote on the proposition that Bank Rate should be
reduced by 50 basis points to 1.5%. Eight members of the Committee (the Governor, Charles Bean,
John Gieve, Kate Barker, Tim Besley, Spencer Dale, Andrew Sentance and Paul Tucker) voted in
favour of the proposition. David Blanchflower voted against, preferring a reduction of 100 basis
points.
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mpc: 32 For one member, the news on the month had been more decisively to the downside and it was
becoming increasingly probable that there would be a deep and prolonged recession. House prices
continued to fall sharply, which would have negative effects on many self-employed who used their
homes as collateral for business loans. There had been no real improvement in financial markets and
conditions in labour markets were worsening quickly. The monetary transmission mechanism was
impaired, which would limit the effectiveness of the various monetary and fiscal stimuli.
Unemployment would rise sharply, especially amongst the young, and there were indications of some
wage rates falling. The risks from delaying further cuts were bigger than those from cutting too far.
For this member an immediate cut of 100 basis points in Bank Rate was warranted.
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mpc: 31 However, the news on the month had left the balance of risks to output and inflation, relative to
the target, to the downside. And despite the impairment in the monetary transmission mechanism
associated with the dysfunctional credit markets, a cut of 50 basis points could still have a significant
effect on the income of many businesses and households, adding to the considerable monetary and
fiscal stimulus which was already in train. The markets had priced in a cut of 50 basis points and
either leaving Bank Rate unchanged this month, or implementing a larger-than-expected cut, could
damage confidence further in both financial markets and the real economy. Weighing these arguments
together, most members concluded that a cut in Bank Rate of 50 basis points was appropriate.
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mpc: 30 In the light of this balance of risks, members discussed how large a cut in Bank Rate was
appropriate this month. Some arguments could be made for leaving Bank Rate unchanged. There had
been a lot of news, which was broadly offsetting for the inflation outlook. Policy measures already in
train were having, and would have, a significant impact, which would be supplemented by the
depreciation in the sterling exchange rate and sharp falls in consumer price inflation. Because these
effects took time to work through, there would probably be further weak data in the near term. Since
Bank Rate was set in anticipation of these developments, the Committee should not be expected to
react to weak data unless the assessment of the economic outlook changed as a result. Moreover, the
February <i>Inflation Report</i> would give the Committee a chance to re-evaluate the medium-term
inflation outlook in the light of all the news. So there was a reasonable case for maintaining Bank Rate
at 2.0%, at least until the next meeting.
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mpc: 28 CPI inflation had fallen to 4.1% in November. Given the reduction in VAT from December, the
decline in commodity prices since mid-2008 and subdued demand growth, CPI inflation was likely to
fall quickly towards, and possibly below, the 2.0% target in the coming months. But the extent to
which the downward pressures on inflation would be offset by the boost to import prices from the
lower exchange rate was uncertain.
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mpc: 29 The Committee discussed whether, amidst all the news about the outlook for growth, there
remained any substantial upside risks to inflation over the next few years. These could arise, for
example, from a sharp fall in the exchange rate, beyond that warranted by economic fundamentals; a
renewed surge in commodity prices; or a quicker than expected rebound in the real economy. But, on
balance, the weakening prospects for output growth, at home and abroad, suggested that the balance of
risks to the medium-term inflation outlook remained to the downside.
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mpc: 27 The implications of the depreciation of sterling depended on the factors behind it. If there were
indications - perhaps from lower gilt prices for example - that a weakening exchange rate reflected a
loss of credibility in UK economic policy, then that would be bad news for the medium-term outlook.
However, to the extent that the falls in the exchange rate were a response to real economic
developments, then they should act as a shock absorber, increasing growth by boosting the relative
demand for UK output. The prospects for sterling and UK exports would depend in part on the
success of economic policies pursued overseas.
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mpc: 26 The Committee noted that the extent of the monetary impetus depended on the level of Bank
Rate, not changes to it. The fact that Bank Rate had been cut from 5% in September to 2% meant that
there was a substantial monetary stimulus already in the system. The transmission mechanism of
monetary policy, while impaired, was not broken. For example, cuts in Bank Rate would reduce the
servicing costs of existing debt for many businesses and households even if growth in the supply of
new credit was limited.
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mpc: 2009. There were a number of factors with the potential to support UK activity: cuts in Bank Rate of
300 basis points since September 2008; measures to support UK banks in October; the fiscal package
announced in the <i>Pre-Budget Report</i>; the substantial depreciation of sterling since the summer of
2008; the sharp fall in commodity prices since their mid-2008 peaks; and the decline in consumer
price inflation. Collectively these amounted to a very significant stimulus to demand, the effects from
which were only beginning to work through the economy.
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mpc: 25 In the United Kingdom, data over the month had been consistent with the Committee's
expectation of a significant contraction in activity in the fourth quarter of 2008. And credit conditions
had continued to tighten, pointing to the need for further measures to encourage the flow of lending to
the non-financial sector. But there was little firm evidence on which to judge the near-term outlook for
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mpc: <h4>The immediate policy decision </h4>
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mpc: 24 The world economy was undergoing an unusually sharp and synchronised downturn. Although
the business cycle in the United States was somewhat more advanced than in Europe, the pattern of the
slowdown in 2008 had shown a consistent intensification from the early autumn onwards in many
countries. A global weakening of consumer and business confidence had taken place, exacerbated by
the collapse of Lehman Brothers in September 2008 and the ensuing financial crisis. UK output
needed to re-balance from domestic demand towards net exports and that would be more difficult if
export growth was limited by weak world demand. But the substantial depreciation in the exchange
rate, if sustained, would aid that re-balancing.
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mpc: 23 Earnings in the three months to October and wage settlements data for November had been
broadly stable. Looking ahead, a BCC survey had suggested that many firms were planning to freeze
pay and some were planning cuts in wages. The Recruitment and Employment Confederation survey
for December suggested that firms were paying lower salaries on average for comparable new job
placements relative to the previous month.
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mpc: 22 The main uncertainties for the short-term CPI outlook were the continuing volatility of
commodity prices and the impact of the depreciation in the sterling exchange rate. The effect of the
exchange rate would depend in part on how persistent the lower level of sterling was expected to be.
Over the longer term, a depreciation in the nominal exchange rate would be associated with a change
in relative prices rather than inflation, but there would be an upwards effect on the price level. The
scale of the depreciation made the potential size of the price level effect important for the inflation
outlook, at least in the short-term.
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mpc: 20 In line with new pre-release arrangements, the Governor had been supplied with the producer
price data for December, a day ahead of publication. These data had shown a small fall in output
prices and a large fall in input prices.
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mpc: 21 CPI inflation had fallen to 4.1% in November and a significant fall was likely in December,
partly reflecting the VAT change. Together with the effect of declines in commodity prices and
subdued demand, it was likely that CPI inflation would fall towards, and possibly below, the 2.0%
target during the first half of 2009. Looking further ahead, CPI was likely to be volatile in response to
the effects of the VAT change on the twelve-month rate, as discussed at the December MPC meeting.
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mpc: <h4>Costs and prices </h4>
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mpc: 19 The latest Bank of England <i>Credit Conditions Survey</i> had revealed a further reduction in the
availability of credit to both households and corporate sectors during the fourth quarter of 2008.
Additional tightening was expected in the first quarter of 2009. Data on bank lending had been weak
but the growth of mortgage lending had not slowed any further in November. The largest lenders to
UK individuals had sustained their mortgage lending growth during the autumn, but many smaller
lenders had sharply contracted lending or left the market altogether. The growth of loans to non-
financial businesses also appeared to have stabilised, although at a low rate, and corporate credit
conditions remained tight. The Bank's regional Agents had reported that businesses had seen a further
tightening in availability of both bank funding and trade credit. Business investment looked set to
remain weak for much of 2009. The Committee noted that those firms which were relatively
successful through this period would eventually increase investment to take advantage of the
opportunity to grow their businesses faster.
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mpc: 17 In addition to the prospects for weak output growth, employment had fallen sharply and
unemployment had risen. Business employment surveys suggested that was likely to continue in the
coming months, reflecting the sharp slowdown in output. Continuing job losses could contribute to
further deterioration in consumer confidence.
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mpc: 18 Indicators of retail demand had suggested that consumption expenditure might be holding up
rather better than feared towards the end of the year. Reports from retail stores and the Bank's
regional Agents suggested sales had weakened further, but there was no suggestion so far that
consumption expenditure had collapsed. In part, this probably reflected aggressive price discounting.
But it was always difficult to judge the influence of seasonal factors on the pattern of retail sales over
the year end. Private car registrations had also been weak.
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mpc: 16 The near-term path of output growth would partly depend on the dynamics of stockbuilding.
Even if there was a continuous and substantial rate of de-stocking, once that rate stabilised it would no
longer contribute a drag on GDP growth. If de-stocking were already in train, then the slowing in
output growth would be greater than the slowing in final demand. In this scenario, there might be a
significant negative contribution to GDP growth for only a quarter or two from stockbuilding. A more
pessimistic scenario would be if the weakness in output growth reflected final demand and de-stocking
had yet to start, in which case the drag on GDP growth in 2009 would likely be larger. The official
data on stockbuilding were only available to Q3 and among the most uncertain in the GDP statistics
and so it was difficult to judge what had happened to stocks recently, though business surveys
generally showed that stock levels were higher than companies desired.
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mpc: 15 In line with new pre-release arrangements, the Governor had been supplied with the industrial
production data for November, a day ahead of publication. These data had shown a sharp contraction
in manufacturing output, broadly as indicated by the business surveys.
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mpc: 13 Oil prices had been volatile over the month. Prior to the MPC meeting there had been some
recovery to nearly $50 per barrel, but they had fallen back on the first day of the meeting. The prices
of some food commodities had also been volatile, but had risen on the month. Both oil and food prices
remained well below their mid-2008 peaks.
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mpc: <h4>Money, credit, demand and output </h4>
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mpc: 14 The news on UK output in 2008 Q4 had been broadly consistent with the sharp contraction
expected at the time of the December meeting. The CIPS/Markit business surveys for December had
actually increased a little. There was not much evidence available yet regarding 2009 Q1, but the
forward-looking survey components suggested that there could be another large contraction. That was
consistent with the survey from the British Chambers of Commerce (BCC). Although not always a
reliable indicator of GDP growth in the past, the Q4 BCC survey had a notably weak tone.
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mpc: 11 In the United States, output growth had been slowing for some time. The target federal funds
rate had been cut to near zero, with signals that it was expected to remain low for some time. The US
authorities had also announced a wide range of measures to boost market liquidity and to support the
supply of credit to the corporate and household sectors. It was widely expected that there would be a
second US fiscal package, much larger than the first.
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mpc: 12 In the euro area, interest rates had been cut by 175 basis points during Q4 and other ECB policy
measures had focused on liquidity provision. EU governments had endorsed proposals to implement
stimulatory fiscal measures worth 1.5% of GDP in aggregate. Member states would be responsible for
deciding the degree of stimulus appropriate for their individual economies.
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mpc: 10 Although output growth had slowed already in many countries, it seemed likely that the collapse
of Lehman Brothers in mid-September and consequent upheavals in financial markets had triggered a
deterioration in business and consumer confidence more widely. In addition, business investment and
output also appeared to have been directly affected by the tightening in the price and availability of
credit. The effects of tighter credit conditions could have been amplified by the earlier steep rise in
commodity prices, which had left companies short of cash. Finally the synchronised nature of the
slowdown might also have been reinforced by the increasingly global nature of supply chains and
credit markets.
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mpc: 9
The US labour market had eased substantially, with recent unofficial data indicating a very large
number of job losses in December. The reaction of the labour market to slowing output growth would
usually be lagged somewhat, but there did not seem to be much delay apparent in the US data.
Employment growth in the euro area was also weak.
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mpc: 8
As a counterpart to this general slowdown in activity, there had been a marked reduction in
international trade, possibly accentuated by a restriction in the supply of trade credit. The Baltic Dry
Index remained at a low level. US and euro-area exports were likely to have contracted in the fourth
quarter of 2008. And there had been sharp falls in Japanese export volumes in November, and in
nominal export growth elsewhere in Asia.
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mpc: 6
The Committee noted that, although there had been a few encouraging signs in financial markets,
there was likely to be further bad news ahead if the global economy continued to slow in line with the
Committee's expectations. Many banks were due to report their 2008 results soon, and any evidence
of larger losses than expected by the markets could cause further financial market volatility.
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mpc: <h4>The international economy </h4>
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mpc: 7
The sharp downturn in the international economy appeared to have been remarkably
synchronised. Although growth had declined in many countries in the first half of 2008, and in some
cases during 2007, the rate of decline had quickened from the early autumn onwards. This change was
apparent, for example, in activity indices from Purchasing Manager surveys across a number of
countries. By December, the JP Morgan Global Purchasing Manager Indices, for both manufacturing
and services, had reached levels well below that indicating no change in activity levels, and were
below their previous troughs in 2001.
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mpc: 5
The Committee identified three potential factors that could have played a part in the depreciation
of sterling. First, relative positions in the business cycle could be responsible for exchange rate
movements through their impact on relative interest rate expectations, which might also reflect a
perception that policymakers had been content with a limited fall in sterling. Although the news in
relative short-term interest rates had been reasonably well correlated with the ERI since August, the
scale of the depreciation could not be accounted for by interest rates alone. A second possible factor
was changes in risk premia. It was possible that portfolios of sterling assets were perceived to have
increased in riskiness relative to portfolios denominated in other currencies, requiring an increase in
compensation. But such risk premia were not directly observable which made it difficult to evaluate
this explanation. A third possible factor was a fall in market perceptions of the sustainable value of
sterling. For example, a decrease in the demand for UK financial services might imply that a sustained
depreciation would be necessary to correct the resulting current account deficit. It was possible that
each of these explanations had played some role. In addition, some of the more volatile movements in
December had probably reflected market illiquidity.
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mpc: 4
The sterling exchange rate had moved markedly during the month. There had been a sharp
depreciation until the end of 2008 followed by a rapid rebound, leaving the sterling effective exchange
rate index (ERI) nearly 3% lower than at the time of the December meeting. Despite the rally in early
January, the most recent 15-day average of the ERI was around 14% below the starting value for the
projections in the November <i>Inflation Report</i> and nearly 20% lower than the starting value for the
August<i> Report</i>. The fall in the ERI over the eighteen-month period to the end of December had been
the largest depreciation since the collapse of the Bretton Woods system of fixed exchange rates in the
early 1970s.
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mpc: 3
Dollar interest rate expectations had moved lower in December after the Federal Open Market
Committee had reduced policy rates to a target range between zero and 25 basis points. Expectations
for euro interest rates over the next six months had also fallen somewhat on the month. In sterling
money markets, a cut of 50 basis points for Bank Rate at the January meeting had been priced in, with
some expectations of a larger cut. Market expectations of Bank Rate further ahead suggested a low
point of around ¾% during 2009. Three-month LIBOR rates had steadily declined following a sharp
fall after the December MPC meeting. The spread of three-month LIBOR over the average of
expected policy rates had fallen by around 90 basis points on the month, to its lowest level since
September. The year end had passed without any evidence of escalating funding pressures for banks.
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mpc:
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mpc: <h4>MINUTES OF THE MONETARY POLICY COMMITTEE MEETING HELD ON 7-8 JANUARY 2009 </h4> 1
Before turning to its immediate policy decision, the Committee discussed developments in
financial markets; the international economy; money, credit, demand and output; and costs and
prices.
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mpc: <h4>Financial markets </h4>
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mpc: 2
Financial markets had been volatile since the December MPC meeting. Despite this, there had
been a few encouraging signs. Sentiment in some markets had improved a little in the few days since
the start of 2009. Equity prices had risen internationally on the month and the FTSE All-Share index
was back close to the level prevailing at the time of the November <i>Inflation Report</i>. There had
recently been some investment-grade corporate bond issuance which had been largely absent during
the previous few months. Corporate bond spreads remained high but non-investment grade spreads in
both sterling and euro had fallen a lot over the previous week. Premia on credit default swaps for UK
banks had been broadly unchanged on the month, although they had edged down over the previous few
days, coming into line with European premia and back to their mid-November levels. But market
conditions remained fragile.
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mpc: </BODY>
</HTML>
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mpc: The following members of the Committee were present:
Mervyn King, Governor Charles Bean, Deputy Governor responsible for monetary policy John Gieve, Deputy Governor responsible for financial stability Kate Barker Tim Besley David Blanchflower Spencer Dale Andrew Sentance Paul Tucker Dave Ramsden was present as the Treasury representative.<h4> </h4>
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mpc: 40 The Governor invited the Committee to vote on the proposition that Bank Rate should be
reduced by 50 basis points to 1.0%. Eight members of the Committee (the Governor, Charles Bean,
John Gieve, Kate Barker, Tim Besley, Spencer Dale, Andrew Sentance and Paul Tucker) voted in
favour of the proposition. David Blanchflower voted against, preferring a reduction of 100 basis
points.
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mpc: 41 Finally, the Governor expressed his appreciation to John Gieve for the contribution he had made
to the Committee.
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mpc: 39 It seemed likely that the Committee would want to consider a range of asset purchases in due
course. That would strengthen the Committee's ability to meet the inflation target. Therefore the
Committee unanimously agreed that the Governor should write on its behalf to the Chancellor to seek
authority to conduct purchases of government and other securities, financed by the creation of central
bank money using the APF. It would be crucial for the Chancellor to ensure that the Government's
debt management policy would be consistent with the monetary policy actions of the MPC. The
Committee recognised that the impact of such operations was both uncertain and subject to time lags.
In communicating the MPC's actions, it would be important to stress that such measures were being
considered in order to meet the inflation target. The publication of the February <i>Inflation Report </i>
would provide an opportunity to emphasise this.
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mpc: 37 In the present environment, where particular credit markets were not functioning normally, it
was appropriate to consider increasing the supply of central bank money by more unconventional types
of asset purchases. Buying private sector assets in such markets, including commercial paper and
corporate bonds, would help to stimulate the economy further by improving liquidity in the markets for
these securities. In turn, that would encourage the flow of credit to companies.
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mpc: 38 The Bank, rather than the MPC, had already been given the authority by the Chancellor to
conduct such purchases, via the Asset Purchase Facility (APF), although in this case financed by the
issuance of Treasury Bills. The APF was a specially created fund, indemnified by the Treasury.
Those purchases were aimed at improving conditions in the specific credit markets rather than
achieving the inflation target. Nevertheless, these measures might help to change banks' behaviour
and boost the broad supply of money, which could provide a material stimulus to nominal spending.
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mpc: 36 But the MPC could also influence the economy by controlling the quantity of that central bank
money directly. Increasing the supply of central bank money in the economy through additional
purchases of government securities should raise private sector spending, both directly (through the
increase in money holdings of private sector asset sellers) and indirectly (through an expansion by
banks of the supply of credit).
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mpc: 35 To the extent that further cuts in Bank Rate could not inject sufficient stimulus, the Committee
would need to use alternative policy instruments. The MPC's ability to influence the value of nominal
spending and inflation in the economy ultimately came from the Bank of England's role as the
monopoly supplier of sterling central bank money: banknotes and reserves held by the banking system
at the Bank. The MPC had up until now influenced the economy by changing the interest rate
currently Bank Rate at which those reserves were remunerated. The Bank had supplied the amount
of central bank money demanded at that level of Bank Rate, mostly by purchasing and selling
government securities.
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mpc: 34 There were also arguments for cutting Bank Rate by 100 basis points this month. There were
parts of the monetary transmission mechanism that still worked and did not rely on the banking sector.
The larger the cut, the larger the stimulus that would be achieved through these channels. It was
possible that banks could find other means for raising revenue to replace the money lost from any
reduction in the spread. In any event, other policies were more appropriate for addressing the problem
of the adequacy of banks' capital, not the level of Bank Rate. For one member, it was especially
appropriate at this time to reach the lower bound for Bank Rate without delay. Historically, policy
errors had been made by cutting too late rather than too soon.
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mpc: 33 Members discussed how large a reduction in Bank Rate was appropriate this month. There was a
great deal of uncertainty about what would happen to banks' and building societies' ability and
willingness to lend at low levels of interest rates. It was possible that the negative impact on
profitability could be significant for some banks as Bank Rate fell further. Taking that into account, a
majority of members concluded that a cut of 50 basis points was appropriate this month.
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mpc: 32 It seemed unlikely that the inflation target could be met solely by cutting Bank Rate. The short-
term market interest rates that Bank Rate sought to influence could not go far, if at all, below zero.
Furthermore, at very low rates of interest, the stimulus that a reduction in Bank Rate could provide was
likely to be much reduced. Indeed, there might even be a point at which further cuts in Bank Rate
could have an adverse impact on the economy since banks and building societies maintained a spread
between their deposit and lending rates to cover the costs of providing banking services and to make a
return on capital. Those deposit rates tended to lie below Bank Rate. Once those deposit rates were at
zero, any further falls in lending rates would squeeze the spread. At that point, banks might decide not
to pass on cuts in Bank Rate, in order to mitigate the impact on their profitability; that would reduce
the effectiveness of monetary policy. However, where banks passed on cuts in Bank Rate to their
borrowers (because, for example, they were contractually obliged to do so), that would lead to a fall in
banks' profits, which might cause them to restrict their lending further with potentially adverse
consequences for the rest of the economy. The scale of these effects remained uncertain.
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mpc: 29 The UK economy was undergoing a significant and sustained adjustment as banks restructured
their balance sheets, and the private sector cut back on spending and increased saving. In the medium-
term, the contribution of net exports to GDP was likely to be higher than over the recent past.
Monetary policy could not and should not seek to prevent that necessary long-term adjustment.
However, in the short run, the challenge was to restore nominal spending growth to levels that were
more consistent with returning inflation to the 2% target, thus helping to reduce the length and depth of
the recession.
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mpc: 30 CPI inflation had fallen to 3.1% in December. Rising unemployment had been accompanied by
waning pay pressures. But the depreciation of sterling was boosting the cost of imports. Inflation was
likely to be uneven in the near term. The Committee's central projection was for inflation to fall well
below the 2% target in the medium term. And the risks to that projection were judged to be slightly to
the downside.
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mpc: 31 The UK economy was already receiving a substantial stimulus from monetary and fiscal policy,
measures to improve the functioning of the banking sector, past falls in commodity prices, and the
depreciation of sterling. Those factors would help to support a recovery in spending. Nevertheless,
the Committee's projections implied that further monetary easing was likely to be needed in order to
meet the inflation target in the medium term.
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mpc: 28 The world economy was in the throes of a severe and synchronised downturn driven by a
collapse in confidence and tightening credit conditions. Official data and surveys suggested that
output in the advanced economies had fallen sharply in the fourth quarter of 2008, and growth in
emerging market economies appeared to have slowed markedly. World trade was contracting rapidly.
This world downturn was affecting the United Kingdom, where output had contracted sharply in the
fourth quarter of 2008. Business surveys were pointing to a similar reduction in output in early 2009.
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mpc: 27 The prospects for economic growth and inflation remained unusually uncertain, reflecting the
exceptional economic and financial factors affecting the outlook. The risks around the central
projection for growth were judged to be heavily weighted to the downside. That in large part reflected
the possibility that, over the forecast period, the authorities at home and abroad were only partially
successful in improving the availability of credit and restoring business and consumer confidence.
There were significant risks on both sides for inflation. On the downside, the main risk was that the
recession might be more pronounced than in the central case, putting further downward pressure on
inflation. On the upside, the main risk concerned the extent of the pass-through from sterling's
depreciation to consumer price inflation. Overall, the balance of risks around the central projection for
inflation was judged to be slightly to the downside.
<h4>The immediate policy decision </h4>
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mpc: 26 The central projection for CPI inflation was for it to fall well below the 2% target in the medium
term, as the downward pressures from the substantial margin of spare capacity outweighed the waning
impact on import and retail prices from the lower level of sterling. The near-term path for inflation
was uneven. That reflected: the marked fall in energy prices, which pulled down sharply on the
inflation projection in 2009; and the direct impact of the temporary cut in VAT. Looking through that
volatility, the medium-term outlook for inflation was a little weaker than in the November <i>Report</i>.
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mpc: 22 Pay growth had diminished further this month. Annual private sector earnings growth had fallen
in November, according to both the average earnings index and average weekly earnings measures,
and were at their lowest rates since 2003. In a survey conducted by the Bank's regional Agents, more
than a third of the respondents, weighted by the number of employees, suggested that they were
considering pay freezes.
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mpc: 23 CPI inflation had fallen to 3.1% in December, after reaching 5.2% in September. That
represented the biggest decline in CPI inflation over a three month period since 1992. Reductions in
petrol prices and the cut in VAT probably accounted for much of that fall.
<h4>The February GDP growth and inflation projections </h4>
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mpc: 24 The Committee reached its policy decision in the light of the projections to be published in the
<i>Inflation Report</i> on Wednesday 11 February. The projections were conditioned on the assumption that
Bank Rate followed a path implied by market yields prevailing prior to the MPC's February decision.
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mpc: 25 In the Committee's central projection, despite the yield curve being materially lower than had
been assumed in the November <i>Report,</i> the near-term contraction in output was substantially deeper, as
the weakening labour market and increased uncertainty weighed on consumption, businesses ran down
inventories and reduced investment, and the weakness in world demand hit exports. Further out, GDP
growth recovered, as the impact of the substantial policy stimulus at home and abroad increased, the
lower level of sterling shifted both domestic and overseas expenditure towards UK suppliers, and the
contribution of stockbuilding rose. But the level of GDP remained lower than in the November <i>Report</i>
throughout the forecast period.
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mpc: <h4>Costs and prices </h4>
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mpc: 21 According to the Labour Force Survey (LFS), employment had fallen by 0.1% in the three
months to November. The reduction in employment had been associated with a marked pickup in
unemployment. On the LFS measure, unemployment had continued to rise sharply taking the
unemployment rate to over 6%, its highest level in nearly a decade. And the claimant count had
picked up further in December. Younger people had been especially affected. Unemployment rates
among individuals under the age of 25 had picked up more sharply since the start of 2008 than for
other age groups. Surveys of businesses' employment intentions remained extremely weak. The
Bank's regional Agents had reported that, for many of their contacts, the next stage of adjustment to
weaker demand could involve more substantial job cuts.
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mpc: 20 As in other parts of the world, the most recent Purchasing Managers Indices had increased. In
services, for example, the CIPS/Markit business activity index for January was 2½ points above its
November trough. The year-ahead business expectations measure had increased by six points in
January alone. Nevertheless, the indices remained close to record lows, and were consistent with a
contraction in output in 2009 Q1 similar to that in the previous quarter.
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mpc: 19 In line with pre-release arrangements, the Governor had been supplied with the industrial
production data for December, a day ahead of publication. Manufacturing output had fallen by 2.2%
in December. The back data had also been revised downwards, such that manufacturing output had
declined by 5.1% in the final quarter of 2008. It was possible that these new data could lead the ONS
to revise down its preliminary estimate for GDP growth of -1.5% that it had published in January.
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mpc: 17 The impact on output of the slowdown in spending was probably being amplified by a stock
cycle. The CBI <i>Quarterly Industrial Trends Survey</i> suggested that manufacturers had run down their
stocks in 2008 Q4, and expected to reduce them very sharply in the first quarter of 2009. Once the
excess stocks had been pared back, it was likely that output would stop contracting so sharply.
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mpc: 18 The depreciation of sterling during 2008 was likely to provide a stimulus to the UK economy by
boosting exports and encouraging spending to switch away from imports towards domestically
produced goods and services. So far it appeared that UK exporters had, on average, responded to the
lower level of sterling by boosting margins, rather than by cutting foreign currency prices and gaining
market share. Sterling export prices had risen by 14% in the year to 2008 Q3, while export volumes
had been fairly flat, despite positive, albeit weak, growth in world trade.
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mpc: 16 Companies had scaled back their investment plans, as confidence had dropped, uncertainty
increased and financing conditions deteriorated. Survey measures of investment intentions had fallen
sharply. In the latest CBI <i>Quarterly Industrial Trends Survey, </i>investment intentions had fallen to their
lowest levels since the survey began in the early 1970s. That confirmed the bleak picture on
investment intentions in the BCC survey that the Committee had seen at its January meeting.
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mpc: 15 According to the Halifax, house prices rose in January by 1.9%. But it was possible that the
Halifax figure reflected volatility in the data. The Nationwide index, by contrast, had fallen by 1.3%
in January. And according to a preview of the January survey from the Royal Institution of Chartered
Surveyors, house prices had continued to fall. Moreover, the balance of surveyors expecting further
falls over the next month had increased again.
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mpc: <h4>Money, credit, demand and output </h4>
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mpc: 13 It was likely that nominal spending had been flat or falling during 2008 as a whole. That was
significantly below the average growth rate of around 5% for the period since the MPC's first meeting
in 1997 a period when inflation had been close to the target on average. Consistent with the weak
growth in nominal spending, the twelve-month growth rate of M4 and M4 lending to the private non-
financial sector had slowed markedly during 2008. The growth of money, credit and nominal
spending would be key early indicators for judging the effectiveness of monetary policy.
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mpc: 14 The seasonally unadjusted ONS data on the value of retail sales suggested that they had been
lower in December than a year earlier. These data were broadly consistent with other indicators of
retail spending, including, for example, the retailers balance from the December CBI <i>Distributive </i>
<i>Trades Survey</i> which had reached its lowest level since the series began in 1983, before recovering
slightly in January. The ONS data suggested that seasonally adjusted retail sales volumes had
increased quite sharply on the month in December. But the ONS had cautioned that these data were
particularly uncertain at the moment. The forward-looking European Commission measure of
consumer confidence did not augur well for near-term consumer spending as it had fallen to its lowest
level ever in January 2009.
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mpc: 11 Further policy stimulus was being enacted in a number of countries. The substantial US fiscal
measures should be agreed by Congress over the next month.
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mpc: 12 One feature of the financial turmoil had been the repatriation of funds by banks and other
investors. That trend had probably been accentuated by policy measures in a number of countries,
which had typically focused on keeping credit flowing to their own domestic residents. This return to
home markets appeared to have been quite pronounced. It had severely aggravated the contraction in
lending and demand in countries where foreign banks had had a very substantial presence and there
was limited domestic capacity to fill the gap. That had happened in some emerging market economies.
But even where the outflows were broadly matched by repatriated funds, there could be costs,
associated, for example, with the breaking of existing bank-customer relationships, as well as longer-
term costs from the reduction of competition in the international allocation of capital.
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mpc: 9
The quickening pace of decline since the autumn of 2008 had appeared to touch every part of the
world. In contrast to the early stages of the crisis, the size of a country's financial sector no longer
appeared to determine an economy's relative performance. Falling confidence around the world was
an important contributory factor behind this stage of the global downturn. But weaker demand and
falling asset prices had exacerbated bank losses and further intensified the credit tightening. A
shortage of trade credit appeared to be one factor behind the sharp downturn in global trade.
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mpc: 10 The worsening outlook for the world economy was also evident in the update to the IMF's world
forecast, published in late January. Compared with its previous forecast published two months earlier,
the IMF had scaled back its 2009 GDP growth projections by 0.9 percentage points to -1.6% for the
United States, by 1.5 percentage points to -2.0% for the euro area, and by 2.4 percentage points to
-2.6% for Japan. It was noted, however, that Purchasing Managers' Indices (PMI), though still very
weak, had picked up slightly in many parts of the world.
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mpc: 8
The decline in Japanese industrial production had been sharp, with output falling by 9.6% in
December alone, and 20.6% on a year earlier. Real household spending had continued to fall, and
unemployment had risen by 0.5 percentage points to 4.4%. Elsewhere in Asia, there had also been
some strikingly weak December figures, with industrial production down 32.3% in Taiwan compared
with a year earlier, 18.6% in Korea and 13.5% lower in Singapore.
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mpc: 7
In the euro area, both industrial and consumer confidence had fallen again. Retail sales volumes
had been flat in December. But steep declines in October, and a downward revision to the November
data, meant that sales volumes had fallen by 0.9% in 2008 Q4. Unemployment had risen to 8% in
December.
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mpc: <h4>The international economy </h4>
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mpc: 6
The synchronised downturn in the world economy had continued. In the United States, the 1.0%
fall in real GDP in 2008 Q4 had been the largest quarterly decline since 1982. Even though a larger
decline had been expected, the composition of spending did not bode well for the near-term outlook,
with a positive contribution to growth of 0.3 percentage points estimated to have come from an
increase in stocks. That was consistent with an unanticipated inventory accumulation and pointed to
further weakness in output in 2009 as those stocks were run down. Non-farm payrolls had fallen by
another half a million in December.
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mpc: 5
The sterling effective exchange rate index had fallen by around 6% at one point during the
month. But it recovered towards the end, leaving the index little changed compared with a month
earlier. Sterling had lost over a quarter of its value since mid 2007. To some degree, that depreciation
had probably reflected the need to rebalance the UK economy away from domestic towards external
demand. In addition over the past year, the global outlook had deteriorated with resultant downward
revisions to interest rate expectations world wide. But the downward revision to forecasts of the UK
economy appeared to have been greater than for some other countries. And those perceptions may
have contributed to sterling's decline. Another factor in sterling's decline over the past eighteen
months could have been increased risk premia.
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mpc: 3
UK money markets conditions had eased early in the month. But term lending had become more
difficult later in the month, and the spread of three-month LIBOR over the average of expected policy
rates had climbed back up towards 150 basis points more recently.
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mpc: 4
Corporate financing conditions remained strained in the United Kingdom. As bank lending
growth had slowed, corporate bond issuance for highly rated companies had picked up in January. But
the market for sub-investment grade debt had remained closed. Sterling investment-grade corporate
bond spreads had risen further, and equity prices had fallen over the month.
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mpc:
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mpc: <h4>MINUTES OF THE MONETARY POLICY COMMITTEE MEETING HELD ON 4-5 FEBRUARY 2009 </h4> 1
Before turning to its immediate policy decision, and against the background of its latest
projections for output and inflation, the Committee discussed financial market developments; the
international economy; money, credit, demand and output; and costs and prices.
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mpc: <h4>Financial markets </h4>
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mpc: 2
Conditions in financial markets remained difficult. There had been a spate of poor bank earnings
results internationally, which appeared to have increased the perception among market participants that
the global banking system was in worse shape than previously thought. And the macroeconomic
outlook had deteriorated further. Against that backdrop, the Government's announcement in mid-
January of a five-point plan to tackle the problems in the UK banking system had initially had little
impact on market sentiment. That also possibly reflected the fact that financial market participants
were waiting for more detail on the plan.
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mpc: 35 The following members of the Committee were present: Mervyn King, Governor Rachel Lomax, Deputy Governor responsible for monetary policy John Gieve, Deputy Governor responsible for financial stability Kate Barker Charles Bean Tim Besley David Blanchflower Andrew Sentance Paul Tucker Dave Ramsden was present as the Treasury representative.<h4> </h4>
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mpc: </BODY>
</HTML>
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mpc: 34 The Governor invited the Committee to vote on the proposition that Bank Rate should be
maintained at 5.25%. Seven members of the Committee (the Governor, Rachel Lomax, Kate Barker,
Charles Bean, Tim Besley, Andrew Sentance and Paul Tucker) voted in favour of the proposition.
John Gieve and David Blanchflower voted against, preferring a reduction in Bank Rate of 25 basis
points.
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mpc: 33 Some members saw the balance of risks differently. The prospects for the US economy had
deteriorated over the month; financial markets had taken a further turn for the worse and stressed
conditions were expected to last for longer. This increased the downside risk to UK growth in the
short term and to inflation further out. While the immediate pressures from oil and commodity prices
had increased, there was no sign that this was likely to feed through to wage settlements and the
Agents' survey confirmed the pressures on firms not to pass through cost increases in consumer prices.
The reductions in interest rates since last summer had been offset by increases in market rates so the
stance of policy might still be on the restrictive side of neutral. The evidence continued to point to the
need for some reduction this spring, broadly in line with the market expectations embodied in the yield
curve. The downside risks argued against delay so these members judged that a reduction in Bank
Rate of 25 basis points was appropriate this month.
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mpc: 32 For the majority of members, despite some differences in their assessments of the risks, the
balance of risks had not changed sufficiently to merit a change in Bank Rate this month. So far, output
and CPI inflation were evolving broadly in line with the central projection in the February <i>Inflation </i>
<i>Report.</i> The economy appeared most likely to be roughly on track for CPI inflation to return to target
in the medium term. Although the central view was predicated on the assumption of some further
modest easing of Bank Rate, back-to-back reductions might lead observers to think that the Committee
was focusing on downside risks to demand at the expense of the medium-term outlook for inflation.
That in turn could lead to an exaggerated response of the market yield curve to a rate reduction. The
Committee would continue to review the balance of risks to inflation, and its implications for the
appropriate level of Bank Rate, as it received new information each month about the economic outlook
and the uncertainties around it.
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mpc: 28 Due to higher household gas and electricity prices, CPI inflation was likely to rise quite sharply
in the coming months. And rising cost pressures were also rippling through the supply chain. The
impact of these pressures on CPI inflation in the short term was, however, uncertain. The recent
survey by the Bank's Agents suggested that businesses facing consumers felt unable to pass all of their
cost increases forward to higher prices.
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mpc: 31 The Committee discussed the balance of upside and downside risks to the inflation outlook. For
several members, the risks on both sides had increased over the past month. There was a range of
views about whether that had affected the balance significantly in either direction.
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mpc: 29 Further ahead, inflation was likely to fall back as commodity prices stabilised. The extent to
which it did so would depend on whether inflation expectations remained anchored on the 2% target.
Measures of inflation expected over the next twelve months had risen recently but the evidence on
longer-term inflation expectations was mixed.
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mpc: 30 There was also a question about how quickly the economy would be able to expand without
placing additional upward pressure on inflation in the medium term. Real take-home pay had been
falling and, following the sharp rise in businesses' input costs, would need to fall further. Pay
settlements and earnings data offered some reassurance that there had been little, if any, pass-through
to wages so far. It was unclear whether employees would, to some degree, resist further erosion of
their spending power. If they did so, the rise in commodity prices could only be accommodated
without putting pressure on inflation if there were to be some rise in unemployment. Furthermore,
there was uncertainty about the extent to which the labour force would expand if the net inflow of
labour from Eastern Europe were to fall, now that the gap between real earnings had narrowed.
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mpc: 27 Against the downside risk to inflation in the medium term from weakening output prospects,
there were risks in the opposite direction from rising energy and other commodity prices. The news on
this front over the month had been adverse for near-term inflation prospects, with rises in oil and food
prices and increasing evidence of price pressures further down the supply chain. Supply responses
would be forthcoming eventually, but the upward pressure on the level of commodity prices was
unlikely to abate in the short term, given prospective global demand developments and short-run
supply constraints. In the United Kingdom, that was compounded by the fall in the sterling effective
exchange rate, which had been greater than expected at the time of the February <i>Report</i>. UK producer
input and output price inflation had risen significantly, as had import price inflation. As commodity
and import price increases worked their way through the supply chain a process that could take some
time it was likely that the upward pressure on prices would extend beyond the energy and food
sectors where it had been most pronounced so far.
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mpc: 26 In the United Kingdom, indicators of activity in the current quarter had given mixed signals, but,
if anything, pointed to less of a slowdown than expected at the time of the February <i>Inflation Report</i>.
Reports from the Bank's Agents still suggested that, outside the financial and property sectors,
business prospects had not deteriorated markedly. Although it was not sensible to put a great deal of
weight on the first data release for expenditure, the initial breakdown for 2007 Q4 raised the question
of whether the growth of final domestic demand had fallen more sharply than producers had
anticipated. Looking forward, surveys of consumer confidence had weakened.
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mpc: 24 A further tightening of credit conditions remained possible. Sentiment had deteriorated in the
money markets and longer-term credit markets. Fears of asset price falls brought about in part by
forced selling on the part of hedge funds and other leveraged investors had increased. It remained very
difficult for banks to securitise lending. Spreads on mortgages and investment-grade corporate bonds
had risen. European banks' recent financial results had not produced any major adverse surprises, but
banks were facing more challenging conditions this quarter than had been expected.
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mpc: 25 There was now mounting evidence of a weakening economy in the United States. But while
there were still downside risks to demand growth in the euro area and Asia, growth there did not seem
to be seriously affected by the problems in financial markets so far. In the euro area, consumption
growth had been surprisingly weak and the rise in the value of the euro would tend to reduce net
exports. In China, domestic demand was growing briskly and domestic policy was being tightened in
an attempt to contain inflation. Overall, this was consistent with the outlook for the world economy in
the February <i>Inflation Report</i>.
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mpc: 21 In contrast to pay, other cost pressures had intensified. Manufacturers' input prices had risen
2.6% in January alone, taking the twelve-month rate to nearly 20%. In February, the input price
indices from the CIPS/NTC manufacturing and services surveys had picked up. Although the
increases had been mainly due to energy and food prices, the contribution of imported items had
generally continued to rise, partly reflecting sterling's depreciation. Manufacturing producer output
prices in January had risen at a twelve-month rate of almost 6%, its highest since 1990, while the CBI
<i>Monthly Trends Enquiry </i>and CIPS/NTC output price indicators had risen in February. A survey by the
Bank's regional Agents had suggested that firms selling directly to final consumers would not pass on
their higher costs in full. The extent and speed at which cost increases would pass through into retail
prices remained unclear.
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mpc: 22 CPI inflation had risen in January to 2.2%, but that was a little lower than expected.
Households' inflation expectations had risen according to the Bank/NOP survey for February; the
median measure, at 3.3%, was 0.3 percentage points higher than in the previous quarter. Additional
questions in the February survey suggested that there were several reasons for the rise, given that
respondents said that they attached importance to a number of factors in forming their expectations,
including perceptions of past inflation, the level of interest rates, the strength of the economy, the
inflation target and media reports. In the light of the likely rise in CPI inflation over coming months,
that was not reassuring in respect of the upside risk to inflation from rising inflation expectations.
However, the more frequent Citigroup/YouGov survey measure had fallen back on the month, from
3.3% to 3.1%, and its measures of expectations of inflation in five to ten years had remained stable.
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mpc: <h4>The immediate policy decision </h4>
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mpc: 23 The latest <i>Inflation Report</i> had explained the balance of risks to inflation facing the Committee
in February. On the downside, there had been considerable uncertainty about the extent to which
demand would slow, reflecting the risks of a further tightening of credit conditions, both at home and
abroad. That entailed the possibility of a higher margin of slack in the economy than expected and
hence a downside risk to inflation in the medium term. But, on the upside, there had been a risk that
another period of above-target inflation, coming so soon after the previous one in 2006-07, might raise
medium-term inflation expectations. That implied a risk that upward shocks to inflation from
commodity prices, for example might persist longer than expected, as wage and price setters acted on
their revised expectations. Both the upside and downside risks persisted this month, and some of the
news suggested that the risks on both sides might have increased. The challenge facing the Committee
was to balance those risks in order to keep inflation on track to meet the target in the medium term.
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mpc: 18 The Committee was briefed by the Treasury representative on the broad outlines of the
Chancellor's forthcoming Budget. An assessment by Bank staff of the implications for the economy
would be undertaken after the details were published.
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mpc: <h4>Costs and prices </h4>
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mpc: 19 The contrast between the fairly strong official data for employment and the indications from
some of the surveys of a weakening labour market had increased. The Labour Force Survey measure
of employment was reported to have increased by 175,000 in the fourth quarter and the unemployment
rate had dropped to 5.2%. In most sectors, vacancies had been higher in the three months to January
than they had been in the previous three months. Total hours worked had fallen, which was consistent
with a reduction in labour hoarding or weakening labour demand. The KPMG/REC <i>Report on Jobs</i>
for February suggested that vacancies had been increasing more slowly and growth in the demand for
labour slackening. The Chartered Institute of Personnel and Development had reported that the
proportion of businesses expecting to make some staff redundant in the near term had risen. The
Bank's Agents also reported a weakening of employment intentions.
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mpc: 17 Forward-looking surveys and feedback from contacts of the Bank's regional Agents were
consistent with the deceleration of demand in the February <i>Inflation Report's</i> central projection. There
was little evidence that the downside risks to inflation from a sharper-than-expected slowdown in
activity, flagged as a risk in the February <i>Inflation Report</i>, had begun to crystallise. But the impact of
the deterioration of credit conditions remained very uncertain.
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mpc: 20 Pay settlements had remained steady in January, with the twelve-month measure at 3.4%;
shorter-run measures were lower. Earnings, including bonuses, had increased at an annual rate of
3.8% in the fourth quarter on the Average Earnings Index measure and 4.2% on the Average Weekly
Earnings measure. The corresponding figures excluding bonuses were 3.7% and 4.1%.
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mpc: 15 Output indicators for this quarter had shown some resilience, and did not seem consistent with a
slowdown in response to earlier unanticipated demand weakness. Both the manufacturing and services
CIPS/NTC activity measures picked up in February, and, together with January's data, suggested that
output growth in the first quarter might be a little above the level expected at the time of the February
<i>Inflation Report</i>.
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mpc: 16 The housing market was evolving broadly in line with the assumptions underlying the February
<i>Inflation Report </i>projections. The average of the lenders' house price indices had fallen 0.4% in
February and the preview of both the backward and forward-looking Royal Institution of Chartered
Surveyors (RICS) survey price balances had suggested that they had fallen again in February. The
preview of the RICS sales-stock ratio had suggested that this had dropped to its lowest level for over a
decade. But the other RICS activity indicators were broadly unchanged and those provided by the
HBF had strengthened slightly. Mortgage approvals for house purchase had also increased a little.
The spread between two-year fixed rates on mortgages and swap rates (lagged one month) had
increased further and was now around a percentage point higher than in August last year, while the
annual growth rate of secured lending to households had fallen in January to its lowest level since
2001.
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mpc: 14 Investment intentions had so far been less affected by the turmoil in credit markets, although the
rate of growth of lending to the private non-financial corporate sector had slowed. The commercial
property sector remained under stress, with property prices continuing to fall significantly. There was
little news about the non-financial sectors in the broad monetary aggregates; the annual growth rate of
households' money had remained steady at around 9% in January, although private non-financial
firms' money had slowed somewhat.
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mpc: 13 More timely indicators of consumption had been mixed. Retail sales volumes had rebounded in
January, growing by 0.8%, but the latest CBI <i>Distributive Trades Survey</i> implied a slowing in
February. Interpretation of these data was complicated by uncertainty about both the seasonal
adjustment of retail sales data at this time of the year and the slowing of the retail sales deflator
relative to the analogous RPI series. The GfK headline measure of consumer confidence (seasonally
adjusted by the Bank) fell in February to its lowest level since 1992, with a further drop in the
proportion of respondents who thought that this was a good time to make a major purchase. The latter
might reflect a tightening in credit conditions facing households. The low levels of the GfK headline
and other consumer confidence measures might also reflect more general pessimism about economic
prospects.
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mpc: <h4>Money, credit, demand and output </h4>
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mpc: 11 The ONS <i>UK</i> <i>Output, Income and Expenditure</i> data release had contained an unchanged estimate
of 0.6% for the Q4 GDP growth rate. On the output side, there had been some small downward
revisions to estimated growth in both services and manufacturing. However, the first release of
expenditure data had showed consumption growth slowing sharply to 0.2% and business investment
contracting by 0.5%, implying the weakest growth in final domestic demand for five years. The
contribution from net trade had increased, and the annual growth rate of stocks in 2007 was the fastest
since 1973. Overall growth had been only a little lower than in the third quarter, although private
sector output had slowed by more.
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mpc: 12 These data raised the possibility that there had been a sharp and unanticipated slowing in
domestic demand growth, leading to an involuntary build-up of stocks. If that were the case, output
growth could be expected to fall during 2008 as firms sought to unwind this build-up. But there were
several reasons for caution. First, the initial ONS expenditure data releases, particularly for business
investment, were prone to substantial revisions. Second, most of the increase in stocks was reported to
have been in the construction sector, not the retail or manufacturing industries, and so did not
necessarily indicate a broad-based slowdown in the demand for goods and services. The Home
Builders Federation (HBF) survey suggested that stocks of homes and work in progress relative to
demand had been at their highest levels in the fourth quarter since the series began in 1992, which was
consistent with the sectoral pattern of stockbuilding reported by the ONS. Third, market intelligence
from retailers did not suggest that there had been such a sharp fall in retail spending growth in the
fourth quarter as a whole. Fourth, survey evidence did not show a sharp fall in demand for consumer
services.
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mpc: 8
In the euro area, data on the expenditure components of GDP in the fourth quarter had suggested
that consumption had been surprisingly weak. Activity indicators for the first quarter were in line with
the expectations embodied in the February <i>Inflation Report.</i> The February services and manufacturing
Purchasing Managers' Index measures, for example, were both consistent with positive, but below-
trend, growth. The European Commission's surveys of business confidence in the industrial and
services sectors painted a similar picture. Lending to the corporate sector appeared to be holding up,
and it was less clear that euro-area banks as a whole had had the same experience as US banks with
`stuck' loans and committed credit lines. As in the United States, producer price inflation had
increased, reaching 4.9% in January. HICP inflation remained at 3.2% in February, above the level
deemed by the European Central Bank to be consistent with price stability.
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mpc: 10 World commodity prices had continued to rise rapidly over the month. The price of Brent crude,
for example, had reached a new high, increasing by 12% in sterling terms. A range of factors were
responsible, with the importance of each factor varying by commodity. Some of the price increases
would affect consumer prices rapidly, while others might take a long time to work through the supply
chain. It seemed unlikely that these inflationary pressures would abate soon, despite the slowdown in
advanced economies. First, demand for commodities from emerging markets, particularly in Asia, was
likely to continue to increase rapidly. For example, many of these economies still had much lower
energy use per head than did OECD countries, and some degree of convergence with advanced
economies was to be expected as the gap between levels of GDP per head narrowed. Second, OPEC
did not seem inclined to increase oil production quotas. Third, in several emerging-market economies,
price subsidies continued to dampen any reduction in demand. Fourth, it was possible that
commodities had become a more attractive asset class to both financial intermediaries and ultimate
investors, perhaps partly as a hedge against a weakening US dollar and partly because of the current
problems in advanced economies' credit markets. Greater involvement of financial firms might also
affect the dynamics of commodity prices in the short run.
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mpc: 9
In Asia, the estimate of Japanese GDP growth in Q4 had been 0.9%, markedly stronger than
expected. However, Japanese GDP data were often revised substantially. Industrial production was
reported to have fallen 1.9% in January, but export growth had held up. Growth in the fourth quarter
in non-Japan Asia had also been somewhat higher than expected at the time of the February <i>Inflation </i>
<i>Report</i>. China posted an annual growth rate of 11.2% and was showing signs of increasing
inflationary pressures. Annual producer price inflation had risen to 6.1% in January and annual
consumer price inflation hit an eleven-year high of 7.1%.
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mpc: <h4>The international economy </h4>
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mpc: 7
For the United States, the main question was how long the current downturn would last and how
deep it would be. There had been little news in the latest estimate for growth in the fourth quarter of
2007, which was unchanged from the previous release at 0.2%. Data for the first quarter of 2008 so far
suggested that growth had been subdued. On the output side, industrial production had risen slightly in
January but the Institute for Supply Management (ISM) index for manufacturing for February had
fallen to a little below the 50 no-change level. The ISM non-manufacturing index had rebounded in
February to just above the 50 level from a very low January reading, but had remained well below its
historical average. Expenditure indicators were also lacklustre. The Federal Reserve's <i>Beige Book</i>
suggested that the slowdown was now broadly based by industry sector and region. Bank lending to
the US corporate sector remained robust, but that might reflect the drawing down of credit lines agreed
before the deterioration in credit market conditions last August and the inability of banks to sell on
corporate loans. Data on both activity and prices suggested that the US housing market had continued
to weaken. Despite the fall in the federal funds rate, some households were facing higher interest
rates. Consumer confidence measures had fallen further in February, with the Michigan measure
hitting a 16-year low. Meanwhile, indicators of inflation had risen. Annual producer price inflation
had reached 7.4% in January, while headline inflation according to the personal consumption
expenditure deflator and CPI had increased to 3.7% and 4.3% respectively.
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mpc: 6
The major news in the foreign exchange markets had been the continued fall of the US dollar, for
which the effective exchange rate index was some 3% lower than a month earlier. The euro effective
rate had appreciated by around 2%, while the sterling effective rate had fallen around 1½% over the
month. These movements appeared to be broadly consistent with conjunctural developments and
expectations of larger cuts in US and UK policy rates than in the euro-area rate. Options prices
suggested that market participants believed that movements in sterling had become more closely
correlated with the dollar and, possibly to some extent reflecting that, the risks to the sterling effective
exchange rate were skewed to the downside.
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mpc: 5
Equity prices ended the month broadly unchanged, as earlier gains had been lost over the few
days prior to the MPC meeting. The comparative resilience of equity markets had been surprising,
given that market interest rates had risen. Investment analysts' earnings expectations had been revised
downward, and spreads on corporate bonds had widened sharply, reflecting increased risk aversion
and/or perceptions of increased corporate credit risk. However, non-financial corporate default rates
had not yet picked up significantly.
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mpc: 4
International market interest rates had risen over the month, with forward rates for the end of
2008 some 10 to 20 basis points higher, perhaps reflecting a growing awareness of upside risks to
inflation and central banks' likely reaction to them. Longer-term forward rates had also risen,
although, perhaps surprisingly, these increases had been associated with rises in long-term risk-free
real interest rates, which might have been expected to fall, given the apparent `flight to quality' in
bond markets. As for inflation break-even rates, these had increased noticeably on the month only in
the euro area, and only at horizons under five years and over fifteen.
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mpc:
http://mpc.theyserveforyou.com/meetings/2008/3/5/11
mpc: <h4>MINUTES OF THE MONETARY POLICY COMMITTEE MEETING HELD ON 5-6 MARCH 2008</h4> 1
Before turning to its immediate policy decision, the Committee discussed financial market
developments; the international economy; money, credit, demand and output; and costs and prices.
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mpc: <h4>Financial markets </h4>
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mpc: 2
Sentiment in international credit and money markets appeared to have deteriorated over the
month. Term interbank spreads had risen in the US and UK money markets, probably reflecting
heightened concerns about counterparty credit risk. Conditions in primary markets for securitised
assets remained difficult and there had been a general widening of spreads on asset-backed securities
(ABS). Spreads on US and UK investment-grade corporate bonds had risen sharply. Spreads had also
risen in the US municipal bond market.
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mpc: 3
It was difficult to pinpoint the precise reasons for this change. The recent financial reporting
season for European banks had not produced any major unexpected losses or problems with reported
capital buffers. There had been some encouraging news about the possible recapitalisation of the
major non-bank financial guarantors (the `monolines'). However, as various asset prices fell, highly
leveraged borrowers were being forced to sell assets in the face of increased margin calls, thereby
possibly amplifying the downward movement in asset prices. That further encouraged lenders to try to
reduce overall exposures to such borrowers. These concerns had probably been heightened by
developments in the US municipal bond market and the failure of the Peloton Partners ABS hedge
fund in the United Kingdom. Increasing default rates on US mortgages had brought into question the
quality of securitised mortgages with higher credit ratings than those in the sub-prime category. The
continuing uncertainty about where asset prices would settle was discouraging potential investors from
buying, not least because they might fear posting substantial mark-to-market losses in the short run.
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mpc: 34
The Governor invited the Committee to vote on the proposition that Bank Rate should be
maintained at 5.5%. Eight members of the Committee (the Governor, Rachel Lomax, John Gieve,
Kate Barker, Charles Bean, Tim Besley, Andrew Sentance and Paul Tucker) voted in favour of the
proposition. David Blanchflower voted against, preferring a reduction in Bank Rate of 25 basis points.
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mpc: 35 The following members of the Committee were present: Mervyn King, Governor Rachel Lomax, Deputy Governor responsible for monetary policy John Gieve, Deputy Governor responsible for financial stability Kate Barker Charles Bean Tim Besley David Blanchflower Andrew Sentance Paul Tucker Dave Ramsden was present as the Treasury representative.
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mpc: 33 While also recognising the importance of the February forecast round, one member judged that
the outlook for UK-weighted global demand had materially worsened, especially in the United States.
Consequently, the risk of a sharp and persistent slowdown in activity had also increased. There was
little likelihood that wage bargainers would seek higher awards if CPI inflation increased temporarily,
judging by the recent behaviour of pay. In that member's view, a further cut was warranted and would
be consistent with financial market expectations.
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mpc: 32 For most members, no change in Bank Rate was necessary this month. The short-run inflation
outlook had worsened markedly. A second period during which inflation was significantly above
target, so soon after the one in Spring 2007, might be more likely to lead people to revise up their
expectations of future inflation, particularly if the rise in inflation persisted for longer. Movements in
the yield curve and the depreciation of sterling had already provided some further monetary easing.
Reductions in Bank Rate in two successive months might, given the current conjuncture, encourage
observers to think that the Committee was focused more on stabilising demand than meeting the
inflation target and so shift the yield curve down further. The Committee would be able to use the
February forecast round to assess the medium-term outlook for inflation, and the impact on that of
both the upside risk to inflation in the short term and the downside risk to demand and activity.
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mpc: 31 There were upside risks to inflation, however, from the supply side. There had been further
significant increases in world oil and food prices and it now seemed likely that retail gas and electricity
prices would rise sooner and by more than previously expected. By themselves, these price increases
could put substantial upward pressure on consumer price inflation in the short run, so that, for any
given path of output, inflation was likely to be higher in the near term. On top of that, these shocks
were compounded by a sharp decline in the sterling effective exchange rate index. Financial market
prices suggested that there was a significant risk of further falls in sterling. If that were to crystallise,
further pressure would be put on retail prices via higher import prices, the extent depending on the
speed and degree of pass-through. Higher inflation in the short run could raise wage and price setters'
inflation expectations, posing an upside risk to inflation over the medium term.
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mpc: 30 Although output had been slowing broadly as expected, there remained a significant downside
risk to UK activity, and hence to inflation in the medium term, from deteriorating credit conditions
here and abroad. There could be a much sharper fall in growth than in the central projection in the
November <i>Inflation Report</i>. While liquidity concerns in the money markets were gradually easing and
financial markets had not been disrupted by turn-of-the-year liquidity problems as some had feared,
concerns about credit risk remained. Banks were seeking to repair balance sheets and restore capital.
That would have an effect outside the financial sector to the extent that it led banks to rein in their new
lending, which the Bank's most recent credit conditions survey suggested was happening in the United
Kingdom. There was a risk that such tightening would lead to a significant slowing in domestic
demand growth.
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mpc: 29 In the United Kingdom, the growth of domestic demand was estimated to have been very strong
in 2007 Q3. But the CIPS/NTC surveys, reports from the Bank's regional Agents and other indicators
suggested that the economy was slowing. Housing markets had weakened further. The Agents' recent
survey of retail trade indicated that sales growth during the Christmas period had been lower than in
the previous year, but it would be some time before the picture for December and January together
would be clear.
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mpc: 28 On the international front, recent indicators of growth had been broadly in line with the
Committee's November <i>Inflation Report</i> projections, but the near-term outlook for UK-weighted
world demand had deteriorated somewhat, as reflected in downward revisions to Consensus forecasts.
Equity prices had fallen. It was still not clear to what extent the difficulties in the US housing market
would spill over into the rest of the US economy and into the rest of the world. For the euro area, the
question was whether consumption growth would pick up any slack resulting from the impact of
slowing US demand and the appreciation of the euro on net trade.
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mpc: <h4>The immediate policy decision </h4>
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mpc: 27 There had been a considerable amount of news over the past month that was relevant to the
outlook for demand and inflation. At the time of the November <i>Inflation Report</i>, the Committee
judged the risks to growth to lie on the downside and the risks to inflation to be balanced. Since then,
the data outturns had been broadly in line with the November <i>Inflation Report </i>projections for output
and activity, but the downside risks to future demand had increased, reflecting the outlook for UK-
weighted global demand and credit conditions. However, the upside risks to inflation from supply-side
developments had increased in each of the past two months, largely reflecting changes in food and
energy prices and the exchange rate.
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mpc: 26 The short-term outlook for retail gas and electricity prices had changed considerably over the
past couple of months, given world energy price developments and the likely response of energy
retailers. Food prices, too, were likely to push CPI inflation upwards and some of the recent
depreciation of sterling would probably be reflected in import prices in the near term. There were
considerable uncertainties around the short-term outlook. The paths of wholesale oil and gas prices
were difficult to forecast, as were the pricing strategies of energy retailers. Although food and petrol
prices and airfares were likely to rise faster, they were particularly volatile components of the CPI.
And the extent and timing of the pass-through from the exchange rate depreciation were not easy to
judge. Nevertheless, it now appeared likely that CPI inflation would rise quite sharply early in 2008
and RPI inflation seemed less likely to fall back in the short run than had previously been expected.
Inflation expectations reported in the YouGov/Citigroup survey remained elevated but had changed
little on the month.
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mpc: 25 CPI inflation had remained at 2.1% in November, although RPI inflation fell. The contribution
from petrol prices rose to its highest level since 2000, but there were falls in the contributions from
retail gas and electricity prices. In line with pre-release arrangements, an advance estimate of CPI
inflation of 2.1% in December had been provided to the Governor ahead of publication.
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mpc: 23 Annual earnings growth fell in October, according to both the average earnings index (AEI) and
the experimental average weekly earnings (AWE) measure, with the decline particularly pronounced
on the latter, though a wedge between the two measures remained. There had been little news about
pay settlements.
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mpc: 24 Food and fuel prices had contributed to higher input and output price inflation. Manufacturers'
input prices rose sharply, by 1.7%, in November, while manufacturers' output prices increased by
0.5%, taking the annual rate up to 4.5%, its highest since 1991. The CIPS/NTC manufacturing input
and output price balances fell back in December but remained high. The CIPS/NTC service sector
price balances rose a little.
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mpc: 22 Employment had risen by 0.4% in the three months to October and the employment rate had
edged up. But more forward-looking indicators suggested some weakening in labour demand. The
latest KPMG/REC <i>Report on Jobs</i> again reported weaker demand for staff and the latest Manpower
survey showed employment intentions falling back to their lowest since 2001. Prospects had been
worsening for financial and business services, distribution and construction, the very sectors that had
accounted for most of the growth in employment in the year to 2007 Q3.
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mpc: <h4>Supply, costs and prices </h4>
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mpc: 21 Broad money growth, having dropped sharply in October, weakened further in November. The
three-month annualised growth rate had declined to under 7%. But distortions resulting from the
financial market turmoil meant that it was still not clear how much of a risk to nominal demand growth
that constituted.
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mpc: 20 The Bank's <i>Credit Conditions Survey</i> also pointed to a sharp fall in the availability of credit to
larger businesses and expectations that conditions would tighten further over the next three months.
There had been a decline in the Bank's regional Agents' scores for investment intentions and a
reduction in capital goods orders had been reported in the latest CIPS/NTC survey of manufacturing.
At the same time, commercial property prices had fallen sharply. So far, it was difficult to detect any
spillovers from financial market conditions to activity in the corporate sector, apart from finance and
commercial property. Nevertheless, against the background of weaker corporate balance sheets than
previously thought, the outlook for business investment was perhaps poorer than it had been last
month.
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mpc: 19 The housing market had weakened further, with house prices increasing a little less in Q4 than
expected at the time of the November <i>Report</i>. The preview of the Royal Institution of Chartered
Surveyors survey for December had suggested that the price balance had fallen to its lowest level since
1992, and the price expectations balance had dropped too. Mortgage approvals for house purchase had
fallen again, to around 40% below their level a year earlier.
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mpc: 17 Indicators for Q4 suggested that GDP growth had slowed broadly as expected at the time of the
November <i>Inflation Report</i>. The CIPS/NTC business activity balance for services had risen
marginally in December, but activity appeared subdued across most sectors.
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mpc: 18 Among the demand-side indicators for Q4, retail sales volumes had increased by 0.4% in
November. Reports from the Bank's regional Agents and responses to the British Retail Consortium
survey in December pointed to sluggish annual growth in the value of sales, coupled with a
compression of retailers' margins to sustain volumes. That was unlikely to continue indefinitely, and
some cut-back in retailers' orders and a recovery in margins seemed probable at some stage, implying
a slowdown in real consumption growth when that happened. Such a slowdown would also be
consistent with the tightening of credit conditions. The Bank's latest <i>Credit Conditions Survey</i>
suggested that the availability of secured loans had been reduced in the fourth quarter, with a
somewhat greater rise in mortgage spreads than respondents had expected in earlier surveys. The
headline GfK measure of consumer confidence was at its lowest level since 1994, perhaps reflecting
the outlook for real incomes and credit, although there had been much less of a fall in consumers'
expectations of their own economic circumstances.
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mpc: 16 The UK current account deficit was now estimated to have increased to 5.7% of GDP in Q3 the
biggest quarterly deficit in the past 50 years and proportionally the largest in the G7. There had been
significant revisions to the estimates of net foreign investment income, affecting the UK corporate
sector's financial balance rather than those of the household and public sectors. As the United
Kingdom had been running a persistent current account deficit, it was not surprising that foreigners
had built up their net claims on UK residents, thus reducing UK net income from abroad. The
revisions to the sectoral financial balances had two main implications. First, the long-run equilibrium
value of the real sterling exchange rate might be lower than previously thought by market participants.
Second, the UK corporate sector's financial position might not be as healthy as it had seemed, given
that it had been running a lower financial surplus than previously thought.
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mpc: 15 The most recent quarterly UK National Accounts data had left the estimate of Q3 GDP growth
unrevised at 0.7%, although the growth rate of service sector output had been revised down a little.
The estimate of domestic demand growth in Q3 had been revised up to 1.5%, the strongest rate since
1998, while the contribution of net trade had been revised down to -0.9 percentage points, its weakest
since 1995. Consumption growth, at 1.1%, had been strong. That and the revised estimate of the
growth of real post-tax labour income were more in line than the earlier vintages of these data had
been. Business investment was also now estimated to have grown, by 2%, which was more in line
than the previous estimate with what surveys had suggested.
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mpc: <h4>Money, credit, demand and output </h4>
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mpc: 13 There had also been some downside news about growth in Japan, with a downward revision to
the estimate of Q3 GDP growth and a fall in business confidence as measured by the Tankan survey.
For the rest of Asia and other emerging markets, the latest data for GDP in the third quarter had
generally been robust.
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mpc: 14 Some of the most striking news had been about commodity prices. The dollar price of oil had
risen by around 7% and the <i>Economist</i> index of food prices had increased by 5% on the month. The
sterling oil price was around 15% higher than the starting level in the November <i>Inflation Report</i>
projections. Energy prices were more likely than food prices to stay high in the medium term, as the
supply response for foodstuffs was likely to be faster. The production and refining of crude oil were
unlikely to pick up pace for some time and the substitution of alternative energy sources for oil was a
costly and time-consuming process. Higher prices had been effective in reducing demand for oil in the
OECD, but demand was continuing to grow rapidly in many emerging-market economies, in some
cases supported by subsidies designed to insulate domestic economies from the increase in the world
price.
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mpc: 12 As in the United States, global cost pressures had been feeding through into domestic prices in
the euro area. Consumer price inflation was 3.1% in both November and December.
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mpc: 11 Quarterly GDP growth in the euro area had been 0.8% in Q3, according to the latest data release,
but indicators for Q4 continued to suggest that growth had slowed, broadly in line with the November
<i>Inflation Report </i>projections. Output growth in the euro area had been driven primarily by exports and
investment over the past couple of years, so decelerating world demand and the appreciation of the
euro would result in slower growth if there were not some rebalancing of demand, with consumption
making a stronger contribution.
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mpc: 10 Headline consumer price inflation measures had risen sharply in the United States to annual rates
around 4%, largely reflecting higher energy prices. The FOMC's preferred measure of `core' inflation
(which excluded energy) had also edged up and annual producer price inflation had reached a 26-year
high.
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mpc: <h4>The international economy </h4>
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mpc: 9
In the United States, the housing market had continued to deteriorate. However, it remained
unclear to what extent the problems in the housing market were spilling over into other sectors of the
economy. As far as indicators of output were concerned, the most recent Institute for Supply
Management (ISM) balance for manufacturing had signalled contraction, but the non-manufacturing
ISM measure had remained above the neutral 50 level. On the demand side, business spending
appeared to be holding up, with increases in `core' capital good shipments (non-defence, excluding
aircraft) and non-residential construction expenditure in November. Consumption was estimated to
have increased by 0.5% in November, despite falling house prices. Near-term prospects, however,
were less encouraging, with a further fall in the Michigan survey measure of consumer confidence, a
sharp fall in the number of construction jobs, a very small increase in total non-farm payrolls and a rise
in the unemployment rate from 4.7% to 5%. A number of market commentators had suggested that the
probability of a recession in the United States in 2008 had increased.
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mpc: 8
The sterling effective exchange rate index had fallen by around 4% on the month, bringing it
around 6% below the starting level in the November <i>Inflation Report </i>projections<i>.</i> Most of the
movement over December could be explained by movements in the sterling yield curve relative to
other currencies, and thus could be regarded as a response to an adverse demand shock in the United
Kingdom. However, movements in relative interest rates were less able to explain the fall over a
longer period. The recent revisions to National Accounts data, showing a larger estimated UK current
account deficit, might have prompted a change in market perceptions of the long-run equilibrium real
exchange rate, and could have made sterling more vulnerable to further depreciation. That was
consistent with the increase in the downward skew of the distribution of market expectations for the
value of sterling (as implied by financial derivative prices), which could only partly be explained by
changes in the distribution of relative interest rate expectations.
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mpc: 6
Movements in longer-term forward interest rates around the world had been small. UK inflation
forward rates implied by the index-linked gilts market had fallen at the short end of the curve but had
increased at the long end. However, surveys suggested that long-term inflation expectations had
remained broadly stable.
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mpc: 7
Since the Committee's previous meeting, the range of falls of equity price indices in the United
Kingdom, the rest of Europe and the United States was 3 to 5%. Uncertainty about future equity
prices, as measured by implied volatility, had picked up, but remained low by the standards of past
episodes of financial stress. Equity risk premia appeared to have risen. Investment analysts' forecasts
suggested that corporate earnings per share were expected to rise in 2008 in both the United States and
the United Kingdom. However, these forecasts did not necessarily coincide with the expectations of
equity holders themselves, given an expected slowdown in activity.
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mpc: 5
Since the Committee's previous meeting, market expectations of the near-term path of official
rates had fallen by 15 to 25 basis points for the United Kingdom and by 25 to 50 basis points for the
United States. In contrast, expectations of the policy rate for the euro area had risen by 5 to 10 basis
points. Market participants attached a high probability to a reduction in Bank Rate this month or next,
followed by further cuts over the course of the year. Respondents to the Reuters survey assessed the
probability of a reduction in Bank Rate this month at around 40%, although only around a fifth of
respondents had a reduction as their central expectation. Market commentary had focused largely on
UK demand developments rather than the inflation outlook. In the United States, the Federal Open
Market Committee (FOMC) had reduced its target for the federal funds rate last month. Markets had
priced in another fall of at least 50 basis points this month, with more to follow. The expected path of
the euro-area policy rate remained broadly flat.
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mpc: 4
Experience from previous banking crises suggested that the faster bad debts were acknowledged
and banking systems recapitalised, the sooner the tightening of credit conditions would be unwound.
It was, therefore, good news that several sponsors of structured investment vehicles had succeeded in
restructuring them and that a number of banks had responded quickly by raising fresh capital in
bilateral deals with, among others, sovereign wealth funds. Nevertheless, uncertainty would remain
high at least until after the next financial reporting season and, with the prospect of defaults rising in a
slowing economy, banks were becoming more cautious about expanding their balance sheets.
In Europe, and especially the United Kingdom, the introduction of the new Basel II regulatory regime
for all banks at the beginning of 2008 would also affect their risk-weighted capital ratios. That might
have a knock-on effect on their willingness to lend.
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mpc: 3
Forward spreads suggested that it might take several months before conditions in money markets
returned to normal. There had been a marked widening of credit spreads and increases in credit default
swap premia for financial institutions internationally since October and further announcements of
mark-downs on assets were expected. That reflected continuing uncertainties about the extent and
distribution of banks' losses on mortgage-backed securities and other balance-sheet items as a result of
the US sub-prime crisis. US mortgage defaults had increased further. The total net losses from
mortgage defaults so far had not been large relative to the capital of banks, but the complexity and
opacity of many of the financial instruments ultimately backed by mortgage assets meant that some
institutions might still be facing unexpectedly large exposures.
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mpc: <h4>Financial markets </h4>
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mpc: 2
There had been a marked reduction in the past month in the premia over expected policy rates in
the term interbank markets, particularly for sterling. They were now back around their October levels,
although still above those prior to the onset of financial turbulence in August. The co-ordinated
actions by central banks in December to promote marketliquidity around the turn of the year appeared
to have helped, and the year-end had passed without the emergence of major new liquidity problems.
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mpc: <h4>MINUTES OF THE MONETARY POLICY COMMITTEE MEETING HELD ON 9-10 JANUARY 2008</h4> 1
Before turning to its immediate policy decision, the Committee discussed financial markets
developments; the international economy; money, credit, demand and output; and supply, costs and
prices.
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mpc: 38
The Governor invited the Committee to vote on the proposition that Bank Rate should be
reduced by 25 basis points to 5.25%. Eight members of the Committee (the Governor, Rachel Lomax,
John Gieve, Kate Barker, Charles Bean, Tim Besley, Andrew Sentance and Paul Tucker) voted in
favour of the proposition. David Blanchflower voted against, preferring a reduction in Bank Rate of
50 basis points.
39
The following members of the Committee were present:
Mervyn King, Governor Rachel Lomax, Deputy Governor responsible for monetary policy John Gieve, Deputy Governor responsible for financial stability Kate Barker Charles Bean Tim Besley David Blanchflower Andrew Sentance Paul Tucker Dave Ramsden was present as the Treasury representative.<h4> </h4>
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mpc: 37 For one member, more weight should be placed on the risk of a very sharp slowdown in UK
growth. There were similarities between the recent data and outlook for the United Kingdom and
those for the United States several months previously, especially in the labour market. Subdued pay
pressures and increasing spare capacity in firms would mean that the prospective short-term rise in
inflation should not carry through to the medium term. For this member, a larger, precautionary
reduction in Bank Rate was warranted, bringing forward cuts already built into the yield curve.
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mpc: 36 For a majority of Committee members, balancing these key risks required an immediate
reduction in Bank Rate of 25 basis points. Interest rates were probably still bearing down on demand,
partly because higher market spreads meant that the level of Bank Rate consistent with any given
monetary stance was lower than it had been before spreads had widened. The February<i> Inflation </i>
<i>Report,</i> and its accompanying projections, would set out in detail the upside and downside risks to the
outlook for inflation. The central projection suggested that there was most likely to be some spare
capacity in the economy, even if interest rates followed the path implied by market yields. That would
therefore help to ensure that inflation returned to the 2% target in the medium term.
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mpc: 35 Given this outlook for inflation, the Committee noted that some slowing of demand growth, by
reducing the pressure on capacity, was likely to be necessary to return inflation to target in the medium
term. The Committee needed to balance the risk that a sharp slowing in activity would pull inflation
below the target in the medium term against the risk that elevated inflation expectations would keep
inflation above target. Changes in Bank Rate could not be expected to smooth out all short-term
fluctuations in output growth.
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mpc: 34 CPI inflation, at 2.2% in January, was close to the 2% target. But the Committee expected that
higher energy and food prices would raise inflation, possibly quite sharply, in the coming months.
Producer input and output prices were already rising rapidly and the decline in the sterling ERI would
boost import costs further. The impact of these short-term pressures on CPI inflation was likely to
fade later in 2008, so that inflation was likely to fall back towards the target. But measures of inflation
expectations had not fallen in line with actual CPI inflation following its peak during 2007. There was
a risk that above-target CPI inflation in the near term would affect inflation expectations, and hence
have some tendency to persist in the medium term.
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mpc: 32 The turmoil in financial markets had spread to some markets that had been relatively unaffected
previously. International equity prices had been volatile and had fallen sharply during the month,
including those for emerging market economies. Although spreads over expected policy rates had
narrowed in inter-bank money markets in December and early January, they had started to move up
again towards the end of the month. In the face of continuing uncertainty about the scale and
distribution of write-downs by banks relating to sub-prime mortgage assets, and the further
complications arising from ratings downgrades for some of the major non-bank financial guarantors, it
seemed likely that conditions in credit markets would remain difficult for some time to come.
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mpc: 33 In the United Kingdom, activity data during the previous six months had been broadly consistent
with the modest slowdown in growth envisaged in the central projection of the August 2007 <i>Inflation </i>
<i>Report. </i>Credit conditions for households and businesses had been tightening and consumption growth
appeared to have softened. Although the substantial fall in the sterling exchange rate was likely to
boost net exports, promoting a rebalancing of total demand, output growth had moderated to around its
post-war average rate and measures of consumer confidence and business surveys suggested that
further slowing was in prospect, as projected in the February <i>Report</i>.
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mpc: <h4>The immediate policy decision </h4>
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mpc: 30 The Committee discussed the immediate policy decision in the context of the key risks identified
in the February <i>Inflation Report</i>.
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mpc: 31 The prospects for output growth abroad had deteriorated and the disruption to global financial
markets had continued. That posed a downside risk to inflation in the medium term. Growth seemed
likely to slow in the United States, the euro area and Japan. There was no sign of slowing yet in
commodity-producing countries and the emerging Asian economies, which continued to grow
strongly. The Committee thought it most likely that UK-weighted global growth would slow
gradually, with the risks judged to be to the downside.
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mpc: 28 For CPI inflation, the Committee's central projection was for higher energy, food and import
prices to push inflation up sharply in the near term. Inflation was then projected to ease back to a little
above the 2% target in the medium term, as the rise in energy prices dropped out of the twelve-month
rate and capacity pressures moderated. The profile was higher than in the November <i>Inflation Report</i>,
particularly in the near term.
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mpc: 29 As usual, there were substantial uncertainties around these projections. The key risks were: on
the downside, the potential for a greater tightening in credit conditions, and the associated impact on
demand, at home and abroad; and, on the upside, the possibility that the short-term rise in inflation
would lead to a more persistent rise in medium-term inflation expectations. Overall, the risks around
the central projection to growth lay to the downside, while those to inflation were balanced. But there
was a range of views among the Committee on both the central projection and the balance of risks.
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mpc: <h4>The February GDP growth and inflation projections </h4>
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mpc: 26 The Committee reached its policy decision in the light of the projections to be published in the
<i>Inflation Report</i> on Wednesday 13 February. The projections were conditioned on the assumption that
Bank Rate followed the path implied by market yields, falling to around 4.5% by the end of 2008.
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mpc: 27 The Committee's central projection for GDP growth was for output to slow markedly through
2008 as tighter credit conditions and weaker real income growth bore down on domestic demand.
Growth was projected to recover as credit conditions improved and the effects of lower interest rates
and weaker sterling worked through. The projected slowdown was somewhat deeper and more
prolonged than in the November <i>Inflation Report</i>.
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mpc: 25 Short-term measures of inflation expectations had remained elevated. This was not surprising,
given the Committee's own projections, but inflation expectations had not fallen back in line with
actual CPI inflation following its temporary rise during 2007. The GfK NOP consumer confidence
survey in January had reported that perceptions of current inflation had risen over the previous year to
their highest since the question was first asked in 1995, although the forward-looking measure
remained close to its series average. The Citigroup/YouGov measure for year-ahead price
expectations had risen by 0.6 percentage points to its highest-ever reading. However, the longer-term
(five to ten years ahead) expectations measure in this survey was broadly stable.
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mpc: 24 CPI inflation had been unchanged in December at 2.1%. In line with pre-release arrangements,
an advance estimate of CPI inflation of 2.2% in January had been provided to the Governor ahead of
publication. The Office for National Statistics had also confirmed that they would cease the phasing-in
of utility prices, starting with the February index. CPI inflation was likely to rise sharply in the
following few months, given previously announced changes in electricity and gas prices, the upward
pressure on oil and food prices, and more general pressure on imported prices following the recent
depreciation of sterling. And rises in the twelve-month inflation rate would also reflect cuts in energy
prices during 2007 dropping out of the annual calculation.
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mpc: 23 Annual manufacturing input price inflation had risen to 11.2% in December. Unlike in previous
months, this latest rise had not been driven by energy or food but by imported materials, perhaps an
early sign of the consequences of the weakening exchange rate. Output price inflation had also risen,
to 5% in December, its highest since August 1991. Many of the manufacturing survey price balances
were also showing readings that were at their highest since the series began, although most did not
have long histories. In the services sector, both the CIPS/NTC and BCC surveys had recorded output
price increases, the latter a record high.
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mpc: 22 Pay settlements were broadly unchanged in December and for early data on January. That had
been consistent with the annual survey on pay carried out by the Bank's Agents. Total average
earnings growth, at 4.0%, had been unchanged in the three months to November. The Average
Weekly Earnings series indicated some slowing in pay growth, narrowing the wedge over the Average
Earnings Index measure.
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mpc: <h4>Costs and prices </h4>
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mpc: 21 In the labour market, there had been a growing divergence between the evidence from the robust
official data and the softer signals from business surveys. In the three months to November,
employment was estimated to have increased by 175,000, the largest three-monthly rise since 1997,
and the unemployment rate had fallen slightly. This reflected the strength in UK activity growth
during 2007. In contrast, the CIPS/NTC surveys suggested that employment growth had drifted down
in recent months. And most indicators suggested that recruitment difficulties had been declining,
especially in manufacturing.
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mpc: 20 There had been little new evidence on the supply of corporate credit. Although sterling
corporate borrowing continued to grow robustly, the growth of total credit facilities granted to non-
financial companies had slowed, which might indicate some financing constraints on future business
investment. The CIPS/NTC capital goods new orders index had also fallen sharply in two successive
surveys, alongside a fall-off in export orders. The commercial property market had weakened
significantly. Although investment in non-residential construction accounted for only a small
percentage of GDP, a sharp contraction could reduce growth significantly.
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mpc: 18 Activity in the housing market had continued to decline, with mortgage approvals for house
purchase reaching their lowest since 1995. Forward-looking indicators of activity had also fallen,
including the balances for site visitors (seasonally adjusted) recorded in the Home Builders Federation
survey and new buyer enquiries in the preview of the Royal Institution of Chartered Surveyors survey.
House prices had been broadly flat in January.
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mpc: 19 The Committee discussed the potential impact of a housing market slowdown. A period of
relative stability in house prices would be welcome. A small number of borrowers for whom fixed
mortgage rates would be re-set during 2008 could face higher repayments, which might affect their
saving and consumption plans. Given the general uncertainty about economic prospects and access to
credit, it was possible that precautionary saving would rise. But there was little evidence to suggest
that a slowing housing market would lead to widespread financial distress and defaults in the United
Kingdom unless there was also a significant rise in unemployment or mortgage rates, which had both
been factors in the rise in possessions in the early 1990s.
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mpc: 16 Business survey data for output in January had generally indicated continuing growth, but the
more forward-looking elements were consistent with slowing activity. The CIPS/NTC survey for
manufacturing output continued to indicate positive growth in January but the new orders balance had
signalled contraction. The services survey output balance had edged up, but the business expectations
balance had been its lowest level since 2001.
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mpc: 17 Consumption growth appeared to have eased. Retail sales volumes had fallen by 0.4% in
December, although were still 2.7% higher than December 2006. The survey evidence for January had
been consistent with some further easing, although the changes in the CBI <i>Distributive Trades Survey</i>
balance, and the Agents' scores for retail goods, had been small. The GfK NOP consumer confidence
survey on behalf of the European Commission (seasonally adjusted by the Bank) had fallen further, to
its lowest level since December 1992, and retailers' profit warnings had increased.
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mpc: <h4>Credit, demand and output </h4>
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mpc: 15 In the United Kingdom, the provisional estimate of GDP growth in the fourth quarter had been
0.6%, around its post-war average rate. Manufacturing output was reported to have been broadly flat
for the second successive quarter and there had been a fall in service sector growth to 0.7%. The CBI
<i>Quarterly Industrial Trends</i> and the British Chambers of Commerce (BCC) surveys had been
consistent with slightly stronger Q4 growth, especially in manufacturing. But persistent differences
between the strength of the official and business survey data for manufacturing were not unusual.
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mpc: 13 In Japan, there had been little news on output growth. Elsewhere in Asia, growth had been
robust. The Committee concluded that it was too early to tell how far the emerging market economies
would be affected by slowing growth in the developed economies. There had been some weather-
related disruption in China, which should prove to be temporary, but rising inflationary pressures
indicated that growth there might need to slow somewhat.
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mpc: 14 HICP inflation in the euro area had reached 3.2% in January, its highest since the inception of
the euro. US CPI inflation had fallen a little, to 4.1% in December, although the core measure had
picked up to 2.4%. In Japan, annual core CPI inflation had reached 0.8% in December, its highest rate
for nearly ten years. But the sterling price of oil had fallen by over 8% on the month.
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mpc: 11 The US authorities were responding to the deteriorating outlook for growth by relaxing both
monetary and fiscal policy. In addition to the cuts in interest rates, a fiscal package was being
negotiated, with proposals to include tax rebates for people on lower incomes and measures designed
to stimulate capital spending on new equipment. The overall stimulus to activity would be substantial.
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mpc: 12 In the euro area, there had been less significant news, but growth also seemed to have been
slowing. Consumption growth appeared to have eased, with retail sales down 1% in the fourth quarter
and the European Commission consumer confidence survey had weakened further in January. A
mixture of survey data for manufacturing and services had pointed to modest growth in the first quarter
of 2008. The latest credit conditions survey had also suggested tightening credit availability.
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mpc: <h4>The international economy </h4>
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mpc: 10 There had been a variety of weak data for the United States over the month. GDP growth in the
fourth quarter had been estimated at just 0.2%, partly reflecting the largest fall in residential
investment for 26 years. Stockbuilding had also made a significant negative contribution, whereas
consumption and non-residential investment had been more robust. The manufacturing survey by the
Institute for Supply Management (ISM) had indicated some modest expansion in January, but the non-
manufacturing business activity balance had declined by 12.5 points to 41.9. The January non-farm
payrolls data had shown a contraction in employment and downward revisions to the level and growth
of employment during 2007. US housing activity data had also been weak, with declines in housing
starts, new building permits and new home sales. The latest Senior Loan Officers' Survey had
indicated a further tightening in lending standards.
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mpc: 8
Longer-term nominal forward interest rates in the United Kingdom, the euro area and the United
States were generally higher on the month, by up to 25 basis points. In the United States, there had
been a fall of around 25 basis points in five-year forward real interest rates, five years ahead, and a
larger increase in the corresponding implied inflation rates. This seemed to be consistent with a rise in
future inflation uncertainty, given the increase in implied interest rate volatilities at the same maturity.
In the United Kingdom, longer-term implied inflation rates derived from index-linked gilts had
continued to move slowly upwards but implied volatilities had not increased to the same extent as in
the United States.
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mpc: 9
The sterling effective exchange rate had been broadly unchanged on the month. The balance of
risks, as derived from options prices, continued to suggest that market participants placed greater
weight on the risk of further falls, rather than rises. The starting point for the sterling effective
exchange rate index (the ERI) in the February <i>Inflation Report</i> was around 6% lower than that for the
November <i>Inflation Report</i>.
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mpc: 7
In the United Kingdom, short-term interest rates were little changed on the month. In the euro
area they had fallen by 40-50 basis points. In the United States, the Federal Open Market Committee
had cut their policy rate twice, by a total of 125 basis points, including 75 basis points in an
unexpected inter-meeting move on 22 January. Uncertainty about the future path of interest rates had
risen internationally.
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mpc: 6
International equity markets, which had previously been affected less by the developments in
credit markets, had fallen sharply in the middle of the month and had remained volatile since. The
falls had been prompted by further news about bank write-downs and the monoline downgrades as
well as weaker data, especially for the US economy. The major UK and US equity indices were 5-6%
lower since the previous MPC meeting, and euro-area indices had fallen by around 10%. Emerging-
market indices had previously been more resilient, but they too had fallen by an average of around 8%
on the month.
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mpc: 4
The news on the month had indicated that pressure on banks' balance sheets had continued to
intensify. Some large US and European banks had reported revised and higher write-downs related to
sub-prime mortgage ABS. There remained considerable uncertainty in financial markets about the
positions of firms that had yet to report any significant losses. In some cases, this was because of
different reporting cycles, but in part it also possibly reflected the potential for differing accounting
and regulatory practices across countries.
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mpc: 5
In addition, there had been ratings downgrades for some of the major non-bank financial
guarantors (known as `monoline' insurers). These guarantors sold credit protection on a variety of
assets including US municipal bonds and structured credit products. As default probabilities had risen
on assets guaranteed by the insurers, there had been mounting concern about counterparty credit
exposures, and hence the value of the insurance had fallen. Further downgrades were likely. It was
possible that banks might have to make provisions against their exposures to the monolines, or take
further write-downs on the insured assets, and might feel pressure to sell some of those assets into an
already depressed market. The changing value of insurance would not in itself increase the overall
scale of losses related to sub-prime mortgages, but it would have the effect of redistributing those
losses towards the banking system, among others, and would raise the already high degree of
uncertainty about banks' capital ratios.
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mpc: <h4>Financial markets </h4>
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mpc: 2
Financial markets had continued to be stressed. Markets for most asset-backed securities (ABS),
particularly those backed by mortgages, had remained largely closed and spreads had continued to
widen. In both the United States and the United Kingdom, spreads on ABS backed by credit card
repayments and commercial property had also widened.
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mpc: 3
In inter-bank money markets, unsecured interest rate spreads over expected policy rates had
continued to narrow in early January, with funding conditions for UK banks reported to have improved
a little. But towards the end of the month, these spreads had begun to edge slightly wider and market
contacts reported that liquidity conditions had started to deteriorate again. Forward markets suggested
that money market spreads were expected to narrow slowly during 2008.
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mpc:
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mpc: <h4>MINUTES OF THE MONETARY POLICY COMMITTEE MEETING HELD ON 6-7 FEBRUARY 2008</h4> 1
Before turning to its immediate policy decision, and against the background of its latest
projections for output and inflation, the Committee discussed financial markets developments; the
international economy; credit, demand and output; and costs and prices.
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mpc: <h4>MINUTES OF THE MONETARY POLICY COMMITTEE MEETING HELD ON 10-11 JANUARY 2007</h4> 1
Before turning to its immediate policy decision, the Committee discussed developments in
financial markets; the international economy; money, credit, demand and output; and supply, costs
and prices.
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mpc: <h4>Financial markets</h4>
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mpc: 2
In the United Kingdom, the United States and the euro area, short-term interest rates had risen by
around 30 basis points since the Committee's December meeting and longer-term forward rates had
risen by 10-30 basis points. Interest rates had risen steadily over the month and there had been no
obvious single explanatory factor. In the United Kingdom, market prices were now consistent with a
further increase of 25 basis points in Bank Rate in the next few months and a relatively flat profile
thereafter. Expectations for interest rate increases in the euro area had also firmed and expectations of
cuts in the United States had diminished somewhat.
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mpc: 3
Foreign exchange rates were little changed on the month. The sterling effective exchange rate
index (ERI) had remained near the top of the range it had occupied for the previous decade. Estimates
published by a number of economic commentators were all consistent with a long-run equilibrium
exchange rate below the current level.
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mpc: 4
The major equity market indices in Europe and Japan had risen again on the month, despite
rising real interest rates. There had been general buoyancy in asset prices, which some thought partly
reflected the expansion in global liquidity and credit. Relatively low interest rates, for example in
Japan and Switzerland, might be helping to fund cross-currency investments into higher yielding
assets, with investors assuming that low exchange rate volatility would persist, as implied by options
prices.
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mpc: 5
Estimates of the equity risk premium seemed not to have declined in line with the continuing
compression of spreads for more risky fixed-income assets. One possible explanation of this could
have been the strong income growth and high saving rates in Asian countries which tended to invest in
fixed-income securities rather than equities.
<h4>The international economy</h4>
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mpc: 6
The news on the world economy during the month pointed to continued growth in the United
Kingdom's major overseas markets. Survey and official data for the euro area in the fourth quarter had
been consistent with GDP growth slightly above trend. The apparent weakness in German retail sales
growth in 2006 remained a puzzle given the increase in VAT that had been announced for the start of
2007. But stronger employment growth in Germany seemed likely to support household income and
hence future consumption spending.
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mpc: 7
In the United States, the fall in home sales had shown some signs of leveling off and there was
little evidence of a significant spillover from the weak housing market to consumption. Employment
growth was particularly robust in the fourth quarter and this would support consumption. The Institute
of Supply Management (ISM) manufacturing survey index for December had been consistent with
some degree of expansion in output. The ISM non-manufacturing index had eased slightly, but
remained high. GDP growth in the fourth quarter seemed likely to be firm. It now seemed more
probable that the United States would experience only a modest overall slowdown in growth,
concentrated in residential investment and the auto sector.
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mpc: 8
The spot price of oil had fallen by nearly 18% on the month, reflecting unusually mild winter
weather in the United States and high stock levels. In the previous week the prices of several metals
had fallen. In the euro area, the flash estimate of HICP inflation for December was for an unchanged
rate of 1.9%. US CPI inflation had picked up to 2% in November, from 1.3% in October, as the
negative effect from lower energy prices diminished. Falling US unemployment might presage greater
wage pressures, but the relatively high profit share in the United States suggested that any pickup in
pay growth might not feed directly into higher prices.
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mpc: <h4>Money, credit, demand and output</h4>
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mpc: 9
The level of UK GDP had been revised up by some 0.2%, though the estimated quarterly growth
rate in the third quarter had remained at 0.7%. Within the expenditure components, the levels of
consumption and whole economy investment had been revised down, while the levels of net trade and
business investment were higher.
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mpc: 10 In December, the CIPS/RBS business activity index for services had recorded a balance of 60.6,
its highest level since June 1997. The Bank's regional Agents had also reported slightly stronger
service sector output growth. However, the weighted number of profit warnings from service sector
businesses had increased further in the fourth quarter, although it was not clear whether this indicated
something about the level of overall activity, or other factors such as unexpected cost increases.
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mpc: 11 Manufacturing growth in the fourth quarter looked to have been weaker than earlier in the year.
Data from the Office for National Statistics (ONS) had recorded a fall in output in October which was
largely reversed in November, but the CIPS/RBS survey balance had eased further in December.
Taking monthly manufacturing and services data, business surveys and the Agents' reports together
suggested that Q4 GDP growth would be close to its longer-term potential rate.
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mpc: 12 Expenditure indicators for the fourth quarter indicated reasonably robust growth. Retail sales
had risen by 0.5% in the 3 months to November. And a survey by the Agents had suggested that sales
in December had been higher than a year earlier. In the housing market, the average of the lenders'
house price indices was up 3.7% in the fourth quarter and 9.5% in the year to December. The quantity
indicators gave more mixed signals: loan approvals were high, but the Royal Institution of Chartered
Surveyors' survey balance for new buyer enquiries had continued to fall. The ratio of house prices to
earnings remained well above its long-run average although it remained difficult to know how much of
this could be justified by a fundamental shift in demand relative to supply.
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mpc: 13 The annual growth rate of broad money (M4) had slowed to 13% in November, but overall credit
growth (M4 lending) had picked up to 16.5%. Nominal domestic demand growth had picked up
during the course of 2006.
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mpc: <h4>Supply, costs and prices </h4>
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mpc: 14 The latest Labour Force Survey data, for the three months to October, showed the employment
rate stable at 60.1%, and the unemployment and participation rates as having ticked down to 5.5% and
63.6% respectively. A measure of weighted non-employment appeared to have stabilised in the past
few months. On the supply of labour, there was little indication that the extent of inward migration
would diminish in the near term and there probably remained a degree of slack in the labour market.
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mpc: 15 Survey measures of capacity utilisation in manufacturing and services, weighted together to
produce whole-economy estimates, suggested that the degree of spare capacity within firms had been
diminishing. The reports of the Bank's regional Agents had been consistent with a continued
reduction in spare capacity in both manufacturing and services firms in the fourth quarter.
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mpc: 16 There had been little new information on settlements and earnings. Regular pay growth had
picked up to 3.8% in the three months to October. In November, settlements had remained unchanged
at 3%. A report from Income Data Services (IDS) had recorded that the first few settlements in 2007
had produced a median settlement of 4%, compared with a median of 3% in the fourth quarter of 2006.
But these early settlements related to only 10% of the employees normally covered by January
agreements and they included the later stages of some multi-year agreements.
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mpc: 17 The annual rate of inflation in manufacturers' input prices had fallen further in November and
output price inflation had been broadly stable. CIPS/RBS survey measures for December had
indicated that input price inflation had continued to diminish in both manufacturing and services. But
the survey balances for output price inflation in services had picked up a little in December, in contrast
to the manufacturing sector, perhaps reflecting the relative growth of demand.
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mpc: 18 In line with pre-release arrangements, an advance estimate of CPI inflation of 3.0% in December
had been provided to the Governor ahead of publication. That compared with 2.7% in November.
Part of the rise in the inflation rate could be explained by petrol prices having risen this December
while having fallen in December 2005. Analysis of the data had to wait until publication but, since the
summer of 2006, the Committee had been projecting a sharp pickup in CPI inflation during the autumn
and winter months before falling back towards the target in 2007 as energy and import price inflation
moderated. Although that pickup had occurred, it appeared that there had been some news:
lower-than-expected contributions, for example, from energy and university tuition fees, had been
offset by a broader range of price increases, especially for food.
<h4>The immediate policy decision</h4>
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mpc: 19 The world and domestic economies had evolved largely as the Committee had projected in the
August and November <i>Inflation Reports</i> but the recent data had suggested that the balance of risks
might have shifted. In particular, the risk of a greater slowdown in the United States, arising from a
weakening housing market, had diminished. Overall, the world economy appeared to be robust and
the downside risks appeared to have diminished somewhat.
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mpc: 20 There had been a further significant fall in the spot price of oil, which was probably explained by
unusually mild weather and high stock levels. If sustained, the lower oil price would help to contain
inflationary pressures in oil-consuming countries, as well as supporting demand growth going forward.
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mpc: 21 There had been little news about the path of domestic output growth. The level of GDP had been
revised up a little and, within that, the level of consumption was estimated to be a little lower and net
trade and business investment a little higher. The Committee placed little weight on the early
estimates of the expenditure components.
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mpc: 22 In aggregate, the data were broadly consistent with the November<i> Inflation Report</i> projections.
But the CIPS/RBS business surveys and the Agents' reports both suggested some upside risks to short-
term growth. And the retail sales indicators for the fourth quarter had been robust, perhaps suggesting
less downside risk of a further slowing in consumption growth. Broad money and credit growth
continued to be very strong and asset prices were buoyant across the board.
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mpc: 23 The Committee considered whether the high level of asset prices should be a concern for
monetary policy. There could be some risk arising from a direct pass through of higher asset prices to
household wealth and hence into the demand for goods and services. There could also be some risk of
a sharp reversal in asset prices although, to the extent that they were reflecting ongoing fundamental
changes in the global economy such as growth in China, it was perhaps unlikely that they would
unwind soon. Some members argued that the strength of money, credit and asset prices could
influence the nominal side of the economy, for example, by influencing inflation expectations. That
strength could be an indicator of incipient inflationary pressures.
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mpc: 24 The labour market had developed largely as the Committee had expected. The quantity
indicators showed a broadly stable picture and there was little evidence yet of any change in wage
settlements or pay growth. The Committee noted the high median pay settlement recorded by IDS, but
it was too early to tell what would happen with January settlements overall. It was likely that there
was some continuing slack in the labour market, but the increase in retail price inflation posed an
upside risk to pay growth.
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mpc: 25 The available survey evidence on spare capacity within firms had suggested that this had continued
to tighten. The Agents had reported an increased readiness of retailers to push through price increases,
particularly for foodstuffs. Investment growth had been strengthening, perhaps encouraged by the
increased supply of labour as well as by robust demand, but it would take some time for new fixed
investment to relieve capacity constraints.
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mpc: 26 In its August and November <i>Inflation Reports,</i> the Committee had anticipated a short-run spike
in CPI inflation, falling back during 2007. While the outturn for CPI inflation had been close to the
Committee's projections during the autumn, some members thought that there seemed to be more
underlying inflationary pressure in the short run than previously expected. Looking back over 2006 as
a whole, the outturn for GDP growth looked set to be very close to that expected in the February 2006
<i>Inflation Report,</i> but CPI inflation was materially higher than projected at that time. Some of that
surprise could be accounted for by the effects of unexpected energy price increases. Another
unexpected increase had come from the rise in fuel duty. One possible explanation for the extent of
upwards pressure on inflation was that profit margins might have been initially squeezed by higher
energy prices in the face of some weakness in demand in 2005. As demand growth had recovered
through 2006, firms might have sought to raise profits by increasing prices.
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mpc: 27 Although the Committee had received advance notification of the December CPI release on the
morning of its meeting, it had not had been able to analyse in detail the reasons for the sharp increase
in inflation. The central projection in the November <i>Inflation Report</i> had been for CPI inflation to fall
back towards the target during 2007, as energy and import price inflation moderated. Some members
thought that the balance of risks to this central case had now shifted to the upside. A risk for the
medium-term was the possibility of dislodging inflation expectations. With RPI inflation likely to be
nearly 4½% in December, the Committee noted that it was important that wage negotiators did not
accommodate what should prove to be a temporary spike in inflation.
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mpc: 28 On the policy decision, the Committee noted that an immediate change in Bank Rate would
clearly be a surprise to financial markets. Market prices indicated that a rate rise of 25 basis points
was expected, but not until February. This probably reflected the fact that the Committee had not
changed interest rates other than in an <i>Inflation Report</i> month for some 2½ years.
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mpc: 29 The Committee agreed that, although the news on the month had been broadly in line with its
central projections, the balance of risks to the outlook for inflation had shifted upwards. There was a
range of views amongst the Committee over the new balance of risks and over whether the news had
been sufficient to warrant an increase in Bank Rate this month or whether it would be better to wait
and judge the news in the context of the Committee's February <i>Inflation Report</i>.
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mpc: 30 For a majority of members there was already sufficient evidence to justify an increase in Bank
Rate and no compelling reason to delay. The world economy was robust, nominal domestic demand
was growing strongly and real output growing at least at its potential rate. Spare capacity had
diminished and inflation had been rising as it had become easier to increase prices. For these members
there was a significant risk that inflation would not fall back as quickly as the Committee had expected
in its central case in the November <i>Inflation Report</i> and little risk that an increase in interest rates
would cause an unnecessarily sharp slowdown in activity. There was a risk that the 50 basis points
rise in Bank Rate since August might not be sufficient to keep demand and inflation expectations in
check and an early increase in rates might prevent larger increases later. For some of these members,
the fast pace of money and credit growth and buoyant asset prices gave additional concerns about
upside pressures to inflation.
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mpc: 31 For other members, there was insufficient news to warrant an immediate increase in Bank Rate.
Although the upside risks had increased, the most likely prospect was that inflation would fall back
later this year. The Committee should not be interpreted as reacting to short-term volatility in CPI
inflation. It was difficult to know how informative the current inflation rate was, given sharp
movements in volatile components such as energy and food. The Committee had already raised rates
by 50 basis points since the summer. If new data made it clear that it was necessary to increase Bank
Rate further then it would help to have the <i>Inflation Report</i> to explain why in the context of the
medium-term prospect. In the meantime, the recent increase in CPI inflation would add to the risks in
the current wage round, and so it was important to communicate clearly that the Committee would act
if pay accelerated or inflation expectations were threatened. But an increase in Bank Rate this month
ran the risk of prompting an excessive monetary tightening by shifting up market interest rates.
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mpc: 32 The Governor invited the Committee to vote on the proposition that Bank Rate should be
increased by 25 basis points to 5.25%. Five members of the Committee (the Governor, John Gieve,
Kate Barker, Tim Besley and Andrew Sentance) voted in favour of the proposition. Rachel Lomax,
Charlie Bean, David Blanchflower and Paul Tucker voted against, preferring to maintain Bank Rate
at 5.0%.
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mpc: 33 The following members of the Committee were present: Mervyn King, Governor Rachel Lomax, Deputy Governor responsible for monetary policy John Gieve, Deputy Governor responsible for financial stability Kate Barker Charles Bean Tim Besley David Blanchflower Andrew Sentance Paul Tucker Jon Cunliffe was present as the Treasury representative.<h4> </h4>
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mpc: <h4>MINUTES OF THE MONETARY POLICY COMMITTEE MEETING HELD ON 7-8 FEBRUARY 2007</h4> 1
Before turning to its immediate policy decision, and against the background of its latest
projections for output and inflation, the Committee discussed financial market developments; the
international economy; money, credit, demand and output; and costs and prices.
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mpc: <h4>Financial markets </h4>
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mpc: 2
The main development in UK financial markets this month had been the reaction to the January
increase in Bank Rate. Most commentators had been surprised by the timing of the interest rate
decision, but had expected a rate rise in February. Interest rates implied by short-sterling contracts had
risen, and had continued to edge up over the month to end the period around 20-25 basis points higher.
Financial markets did not expect a further rate rise this month, but another rise had been fully priced in
by May, and there was a significant probability of a further rise in the summer. The views of
economists, as reflected in the average probabilities of future interest rates as revealed by the Reuters
poll, had seemed consistent with this.
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mpc: 3
There was considerable uncertainty in the financial markets about the near-term path for interest
rates, with a noticeable pickup in three-month implied volatility. There was approximately a 30%
probability attached to an interest rate increase this month by respondents to the Reuters poll. Interest
rates had also risen further along the yield curve.
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mpc: 4
There had also been approximately a 10 basis point rise in short-term interest rate expectations in
the United States, probably reflecting a batch of stronger data and speeches by members of the FOMC.
Longer-term nominal forward interest rates had moved up internationally over the past month. There
had been no obvious news that might have altered perceptions of the long-term global
saving-investment balance or of a marked change in global liquidity.
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mpc: 5
The sterling effective exchange rate index had risen by around 1½% over the past month, and in
both nominal and real terms was at its highest level since the early 1980s. Relative interest rate
differentials were able to account for a significant proportion of the appreciation since the trough in
April of last year. The rise in the sterling exchange rate tended to support the observation that long-
term inflation expectations in the financial markets had remained well anchored.
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mpc: 6
The major equity indices had risen again on the month. The rise in equity prices in the United
Kingdom had occurred despite the rise in UK market interest rates.
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mpc: <h4>The international economy </h4>
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mpc: 7
In the euro area, business surveys pointed to growth recovering to an above-trend rate in Q4,
though the weaker industrial production data pointed to some downside risks. The manufacturing
purchasing managers' index (PMI) had fallen for the third successive month in January, but the
services index had strengthened. German retail sales had risen strongly in December. The latest
information pointed to a muted impact on German growth in the first quarter from the January VAT
increase. Euro-area inflation had remained unchanged in December.
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mpc: 8
In the United States, GDP had been estimated to have grown by 0.9% in the fourth quarter. The
non-manufacturing Institute for Supply Management index had risen in January, though the
manufacturing index had fallen and was pointing to a contraction of output in that sector.
Consumption growth had remained strong, supported by healthy nominal labour income growth in the
fourth quarter. The January estimate of growth in non-farm payrolls had been weaker than market
participants expected, but there had been upward revisions to earlier data. There were signs that the
decline in housing market activity might be coming to an end. But with a substantial stock of unsold
houses, it seemed unlikely that residential investment would recover for a while. Headline US CPI
inflation picked up sharply in December, reflecting movements in energy prices, but the core measure
was steady.
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mpc: 9
The sharp decline in US imports in Q4 might be related to the slowdown in manufacturing
activity. There had been some signs of weakness in manufacturing output and indicators in a number
of countries.
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mpc: 10 Japan, China and the rest of Asia seemed to be growing at least as strongly as expected. So the
recent international activity data taken as a whole suggested that UK-weighted world activity would
continue to grow firmly this year.
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mpc: 11 Following a sharp fall in the previous month, the spot oil price had risen about 10% in dollar
terms since the January MPC meeting<i>. </i>It seemed likely that some of the recent fluctuations had
reflected short-term changes in demand following the unseasonably warm weather and then the more
recent cold snap in North America and Europe.
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mpc: <h4>Money, credit, demand and output </h4>
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mpc: 12 There had been little news in the provisional UK GDP release for 2006 Q4, which showed a
slight quickening in the pace of expansion to 0.8% a quarter. Growth had picked up in services, while
manufacturing output had been flat. However, the December industrial production data had been a
little stronger than expected.
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mpc: 13 The CIPS/RBS service sector activity and new business indices had eased in January, but
remained strong. In manufacturing, the CIPS/RBS indices for output and new orders had both
increased on the month, despite the appreciation of sterling, and continued to point to slightly stronger
activity than the official data. The CBI <i>Industrial Trends Survey</i> also showed little constraining effect
from the exchange rate appreciation, though the Bank's regional Agents reported a slight change in
tone among their contacts, with some increase in reports of lost export orders. Overall, the limited
evidence so far suggested output growth in 2007 Q1 would be broadly in line with that recorded in
2006 Q4.
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mpc: 14 On the expenditure side, survey evidence continued to point to firm investment intentions,
consistent with reports by the Bank's regional Agents. Retail sales had risen in December, and surveys
pointed to firm annual growth in January, though because of the weakness in spending a year earlier
this would be consistent with a broadly flat volume of seasonally adjusted sales on the month. The
Bank's regional Agents had raised their scores for both retail sales and consumer services. There had
been some deterioration in consumer confidence between the two waves of the January GfK survey,
which straddled the Committee's policy meeting, and that might suggest an impact from the most
recent interest rate increase. But there had been little correlation between consumer confidence and
consumer spending in the past, so this was not compelling evidence of slowing consumer spending
growth in response to past interest rate increases. Although it was too early to be sure, there was some
evidence that higher interest rates might be having an effect in the housing market, with a mixed batch
of indicators recently. There had been a sharp drop in mortgage loan approvals in December, and the
preview of the Royal Institution of Chartered Surveyors' (RICS) survey suggested a continuing fall in
the balance on new buyer enquiries in January. In contrast, the RICS ratio of sales to stocks remained
high. Even if the housing market did show signs of turning, the implications for consumption were by
no means clear there might be different correlations from those recorded in the past, depending on
which factors were currently driving the housing market and household spending.
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mpc: 15 There were no new estimates of nominal GDP growth this month. Despite a slight easing in
annual growth rates in December, broad money and credit growth remained robust. Households' M4
growth was broadly unchanged, and remained close to its average over the past five years.
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mpc: <h4>Costs and prices </h4>
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mpc: 16 The Labour Force Survey (LFS) measure of unemployment had fallen slightly in the three
months to November compared with the previous three months, leaving the rate unchanged at 5.5%. A
significant share of the pickup in unemployment over the past two years was accounted for by the 16-
24 age group. The employment rate had fallen slightly in the three months to November, while the
inactivity rate had risen slightly. Full-time employment had contracted while part-time employment
had risen. A considerable part of the rise in part-time employment over the past year had reflected a
rise in those reporting that they wanted full-time work. Similarly, there had been growth in the
number of temporary workers who reported they were unable to find permanent jobs, particularly in
the most recent quarter. As far as the outlook for labour demand was concerned, the picture had been
mixed, with some surveys weakening and some strengthening.
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mpc: 17 The annual rate of average earnings growth, excluding the volatile bonus component, was
broadly the same in the three months to November 2006 as in the equivalent period the previous year.
The three-month AEI-weighted average of private sector settlements had increased slightly through the
year to stand at 3.5% in December. What evidence there was had continued to suggest a further slight
increase in January. But there was relatively little information, as yet, and the early figures were
subject to revision as further settlements were recorded. The Bank's regional Agents had conducted a
special survey on pay prospects, which pointed to slightly higher pay growth this year than last, with
the main drivers being the rise in RPI inflation and the need to recruit and retain staff. The feed-
through from settlements to earnings growth had not always been strong in the past.
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mpc: 18 Latest estimates suggested that, as of 2006 Q3, some further adjustment was still required in the
real consumption wage, following the various energy, tax and import price shocks of the past few
years. That could either come through nominal wage restraint or higher prices. But given the more
recent falls in energy prices and import cost pressures, the total adjustment required was smaller than
had been the case at the time of the November <i>Report</i>.
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mpc: 19 Import and producer input price inflation had continued to fall following the recent energy price
falls, but producer output price inflation had risen slightly. Business surveys suggested that companies
were more confident in their ability to raise prices, with the British Chambers of Commerce survey,
the CBI <i>Industrial Trends Survey</i> and the CBI/Grant Thornton <i>Service Sector Survey</i> of consumer
services all showing strengthening and historically high price balances.
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mpc: 20 CPI inflation had risen to 3.0% in December, and RPI inflation had risen to 4.4%. In line with
pre-release arrangements, an advance estimate for CPI inflation of 2.7% had been provided to the
Governor ahead of publication. This was weaker than had been expected, but analysis of the data
would not be possible until after publication. There had also been an announcement by an energy
distribution company, on the Thursday morning of the Committee's meeting, of cuts in gas and
electricity retail prices. But information on the likely response of the rest of the industry, and the
possibility of further price reductions in the future, was very limited. Domestic energy price
reductions were likely to be quantitatively significant for the near-term outlook for inflation. For the
purposes of the central projection in the February <i>Inflation Report</i>, the Committee had assumed cuts in
the retail prices of gas and electricity, taken together, of around a fifth, spread evenly over the four
quarters from 2007 Q2.
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mpc: 21 The Citigroup/YouGov measure of the public's inflation expectations had continued to pick up,
and had reached 2.7% in January, with the polling occurring after the release of the December CPI
data. This slight pickup broadly corroborated the most recent Bank/NOP November survey of the
public's expectations, which was at the same level as in February 2006.
<h4>The February GDP growth and inflation projections </h4>
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mpc: 22 The Committee reached its policy decision in the light of the projections to be published in the
<i>Inflation Report </i>on Wednesday 14 February.
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mpc: 23 Conditional on market participants' expected path for interest rates, the Committee's central
projection was for UK GDP to expand at a rate close to its average over the past decade, underpinned
by steady growth in household spending and buoyant business investment. Growth eased a little
towards the end of the forecast period as public spending and consumption slowed. The profile was
similar to that contained in the November <i>Report. </i>Overall, the risks to growth were judged to be
balanced.<i> </i>
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mpc: 24 The Committee's central projection was for CPI inflation to fall back quite sharply to below the
target during the first year, as the reduction in energy costs and lower import price inflation fed
through into consumer prices and into business costs. But that was partly offset by higher pay growth
and some rebuilding of corporate profitability. Inflation then settled around the target over the
medium term. The medium-term outlook was similar to that in the November <i>Report</i>, but the near-
term volatility was more pronounced. The central projection for CPI inflation under constant interest
rates was a little higher than under market rates.
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mpc: 25 As usual, there were substantial uncertainties surrounding these projections. These included: the
behaviour of wages and prices in the face of robust demand growth but sharp falls in companies' non-
wage costs; the degree of spare capacity in the economy; and the evolution of inflation expectations.
As in November, there was a greater than usual uncertainty over the outlook for inflation. The
additional uncertainty in the near term was associated with the path of retail gas and electricity prices,
and the width of the inflation fan charts had been further enlarged to reflect this. The risks to inflation
were weighted to the downside in the near term and to the upside in the medium term. There was a
range of views among the Committee on both the central projection and the balance of risks, and these
were discussed in the context of the immediate policy decision.
<h4>The immediate policy decision </h4>
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mpc: 26 On the demand side of the economy, sales over the Christmas and New Year period had seemed
to be robust, and the broad picture remained of consumer spending having been volatile, but with an
underlying upward trend. The prospects seemed to be for growth to be a little higher than its long-
term historical average in the near term, before easing back, but there were risks on both sides. On the
downside, there was a risk that higher interest rates and a larger stock of debt would have a dampening
effect on consumer spending. There was also a risk to consumption from the possibility of a
downward adjustment to asset prices. On the upside, the decline in energy prices and possible
increases in pay growth might boost take-home pay. The risks of a downturn in US activity stemming
from the retrenchment in the housing market had appeared to have receded recently. Some downside
risks to world output growth remained, but the immediate prospect was of another robust year, albeit
slightly below the pace of the past two or three years. But the recent and prospective strength of UK
business investment (which was relatively import intensive) and the appreciation of sterling suggested
that the prospects for net trade might be a little weaker than at the time of the November <i>Report</i>.
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mpc: 27 Overall, the near-term prospects for GDP growth did not appear to have changed greatly this
month. UK GDP growth had picked up slightly in Q4. Based on the available evidence for output,
firm growth was also likely for the first quarter, and the central projection was for it to remain close to
its average rate over the past decade.
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mpc: 28 Most members thought that the margin of spare capacity within businesses was limited, and the
prospect was of a slight tightening in the labour market as demand for labour started to outstrip supply
over the forecast period. There had been little movement in pay settlements in recent months. The
evidence for January 2007 was still far from clear, although the Agents' survey pointed to the
possibility of a modest pickup during this year. Earnings growth had remained stable. The fallback in
non-wage costs might reduce the need for firms to put downward pressure on real take-home pay.
That would be consistent with only a limited pickup in nominal pay growth. But there were significant
risks in both directions. One member thought that the degree of spare capacity in the labour market
was larger than in the central case, and would continue to depress real wages.
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mpc: 29 The latest survey evidence was consistent with some pickup in the public's short-term inflation
expectations. This might reflect the rise in actual inflation over the past year, particularly of frequently
purchased items, and hence might reverse if inflation fell towards the target. But, given the size of the
increase in inflation, it was also possible that expectations would take time to return to target.
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mpc: 30 Business surveys and reports from the Bank's regional Agents pointed to some pickup in firms'
expectations about their ability to raise prices. It was possible that they might be able to push through
larger price increases than assumed in the central case, but continued competitive pressures might
prevent this.
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mpc: 31 The recent outturns for inflation had been volatile, as shown by the data in recent months, and
increased the uncertainty over the near-term profile for CPI inflation. There was particular uncertainty
about the path of retail gas and electricity prices, and the corresponding adjustment of non-energy
costs and prices. Changes in the prices of gas and electricity had a material impact on the recent and
prospective near-term profile of CPI inflation. Some members placed considerable weight on the
downside risks to inflation in the near term. But some members also continued to put weight on the
fast pace of growth of money and credit and the buoyancy of asset prices, which represented an upside
risk to nominal spending and inflation in the medium term.
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mpc: 32 The market expectation was for at least one more increase in Bank Rate. The rise in market
interest rates since the November <i>Report</i>, and the sharp appreciation of sterling, implied a substantial
tightening of monetary conditions. There were lags between rises in interest rates and the impact on
spending and inflation, so it would take some time for the full effects of the past tightening to be seen.
It was difficult to judge whether, and if so by how much, policy might need to be further tightened to
keep inflation on track to meet the target.
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mpc: 33 Some members thought there was a risk that another rise in interest rates would induce a further
rise in the yield curve. Other members thought that, since the market had already priced in the
possibility of a further rise, there need not be a marked reaction to a further near-term tightening of
policy.
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mpc: 34 There was a range of views among the Committee on the relative weights to place on the
different risks to growth and inflation highlighted above. But most members thought that the balance
of all these risks was such that it was appropriate to leave Bank Rate unchanged this month. A closely
spaced series of interest rate increases might lead to excessive tightening. There was time to observe
the impact of past decisions and to see whether any of the upside or downside risks were crystallising.
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mpc: 35 Some other members thought that the balance of risks was such as to warrant an immediate rise
in Bank Rate of 25 basis points. These members put particular weight on the upside risks to inflation
in the medium term because of: the rise in near-term inflation expectations; the evidence of firms'
willingness to increase prices, consistent with the robust picture for demand; and the likely path of
nominal variables in the light of recent money growth and asset price movements. For these members,
the degree of policy tightening since August was still modest relative to the rise in inflation and the
prospective robust outlook for demand, so a further rise in interest rates was required to return inflation
to target.
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mpc: 36 The Governor invited the Committee to vote on the proposition that Bank Rate should be
maintained at 5.25%. Seven members of the Committee (the Governor, Rachel Lomax, John Gieve,
Kate Barker, Charles Bean, David Blanchflower and Paul Tucker) voted in favour of the proposition.
Tim Besley and Andrew Sentance voted against, preferring an increase in Bank Rate of 25 basis
points.
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mpc: 37 The following members of the Committee were present: Mervyn King, Governor Rachel Lomax, Deputy Governor responsible for monetary policy John Gieve, Deputy Governor responsible for financial stability Kate Barker Charles Bean Tim Besley David Blanchflower Andrew Sentance Paul Tucker Jon Cunliffe was present as the Treasury representative.<h4> </h4>
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mpc:
<h4>MINUTES OF THE MONETARY POLICY COMMITTEE MEETING HELD ON 7-8 MARCH 2007</h4> 1.
Before turning to its immediate policy decision, the Committee discussed developments in
financial markets; the international economy; money, credit, demand and output; and costs and
prices.
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mpc: <h4>Financial markets </h4>
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mpc: 2.
There had been substantial volatility in financial markets towards the end of February. Global
equity prices had fallen sharply on 27 February. There had been rallies and further falls in subsequent
days. Share prices in many markets were around 5% lower than on 26 February. Though the
movements in equity prices had been significant in daily terms, the falls were less substantial when
viewed against the upward trend over the past few years. And rises earlier in the month meant that the
FTSE All-Share was only 1½% lower than the starting point for the February <i>Inflation Report.</i>
Spreads on riskier bond classes had widened. And the currencies of economies with the lowest interest
rates had strengthened, as some carry trades the practice of borrowing at low interest rates in one
currency and investing in higher yielding assets in another were unwound.
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mpc: 3.
A variety of unconnected and by themselves relatively insignificant events seemed to have
triggered the financial market movements: for example, rumours about the introduction of capital
gains taxes in China; and some weak US indicators, particularly the fall in durable goods orders.
These events had occurred against a background of worries about the compression of risk premia in
some markets, and heightened concerns about the possible macroeconomic implications of a
deterioration in the US sub-prime mortgage market and the associated exposures of some financial
institutions.
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mpc: 4.
The immediate causes of the recent turbulence were less important than its likely fundamental
origins. One possible explanation was that market participants had for some time been uncertain about
whether the low risk premia embodied in some asset prices were justified. Recent events could have
sparked a period of price discovery where markets engaged in a process of trial and error to discover a
new equilibrium. Much of the information relevant to the discovery of that new equilibrium was the
beliefs of other investors as reflected in the market movements themselves. That process of price
discovery had been associated with asset price volatility. While prices had stabilised in the past few
days, there was no guarantee that the period of volatility had ended.
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mpc: 5.
Not all the significant market movements had been concentrated in the last week of February.
UK short interest rates had fallen by nearly 20 basis points over the month to roughly where they had
been at the beginning of the year, prompted by the release of the unexpectedly weak CPI inflation and
retail sales data in the first half of the month. Nevertheless, market interest rates were still consistent
with the expectation of a further quarter point increase in Bank Rate by the summer. That was similar
to the view taken by City economists: in a survey conducted by Reuters, the median forecast was for
Bank Rate to be 5.5% by mid-summer, though nine of the 64 polled thought that the increase would
happen at this meeting.
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mpc: 6.
The decline in market interest rates was probably one factor behind the depreciation of sterling.
The sterling effective exchange rate index (ERI) had fallen by nearly 3% since the February <i>Inflation </i>
<i>Report</i> and was now back within the relatively narrow band it had occupied over the past decade.
Some of the depreciation had occurred during the period of market volatility at the end of February.
That may have partly reflected the selling of sterling assets by those investors who were reducing their
carry-trade exposure.
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mpc: <h4>The international economy </h4>
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mpc: 7.
Concern about the health of the US economy was one candidate trigger for the volatility in
financial markets. However, over the past few months the activity data had been reasonably firm and
economists had been revising up their projections for growth in 2007. The data this month had not
changed the outlook significantly. On the downside, Q4 GDP growth was revised to 0.6% from 0.9%.
The non-manufacturing Institute of Supply Management (ISM) business activity index for February
fell from 59.0 to 54.3, the weakest reading since April 2003. Capital goods orders and shipments both
fell. But on the upside, the manufacturing ISM index had picked up to 52.3 from 49.3. Taking both
ISM indices for January and February together pointed to growth in Q1 not much different from its
historical trend rate. Personal consumption and disposable income continued to post healthy monthly
gains.
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mpc: 8.
The slowdown in the US housing market had appeared to abate in recent months. But some
indicators, such as new home sales and housing starts weakened in January, though that might in part
have reflected the onset of cold weather after an unusually warm December. Arrears had continued to
increase in the sub-prime mortgage market. Moreover, lending standards had been tightened leading
to a downside risk for the housing market and household spending.
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mpc: 9.
In the euro area, GDP was estimated to have risen by 0.9% in Q4, somewhat stronger than had
been expected at the time of the February<i> Inflation Report</i>. The near-term outlook continued to be
firm. The service sector Purchasing Managers Index (PMI) eased in February, but the manufacturing
index ticked up slightly after three consecutive monthly falls. Taking the January and February survey
data together implied above trend GDP growth in Q1.
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mpc: 10. German retail sales, including the automotive sector, fell by nearly 10% in January following the
increase in VAT, the largest monthly fall since records for the reunified Germany began. However,
early estimates for these data were typically heavily revised. And it was possible that any weakness in
spending might not depress output significantly in 2007 Q1, if firms had been using their inventories to
help smooth production.
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mpc: 11. Japanese GDP growth had rebounded in Q4, and was a bit stronger than expected at 1.2%.
Growth in non-Japan Asia seemed to be pretty much in line with expectations. The spot price of oil
had risen by about 6% in dollar terms, seemingly prompted by increased concerns about Middle-East
supply.
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mpc: <h4>Money, credit, demand and output </h4>
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mpc: 12. The first expenditure breakdown for UK GDP in 2006 Q4 had been published in February. The
GDP growth figure itself had not been revised, and there had been few surprises in the data relative to
the<i> Inflation Report</i> projection. Whole-economy investment had been a little weaker than expected,
but within that business investment had been noticeably stronger. The strength of business investment
partly reflected high levels of investment in the oil and gas sector. Given the propensity for investment
data to be revised, they should be given only a little weight at this stage of the publication cycle. But
they did not provide any reason to doubt that capital spending by businesses would remain buoyant in
the near term, supporting the picture presented by reports from the Bank's regional Agents and
business surveys.
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mpc: 13. The Committee then considered more recent developments. The CIPS/RBS measures of activity
and new business in services both eased further in February. In light of the timing of the meeting, the
ONS had provided the Committee with pre-publication access to the industrial production data.
According to these data, energy output grew strongly in January. They also pointed to a slight fall in
manufacturing output in January. But the survey data suggested that this weakness in manufacturing
was unlikely to persist. The manufacturing CIPS/RBS output index strengthened in February, while
the expected output balance in the CBI <i>Monthly Trends</i> survey reached levels last recorded in May
1995. Manufacturing output appeared to be strengthening in other countries, perhaps reflecting the
interconnectedness of global supply chains.
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mpc: 14. On the spending side, the 1.8% fall in retail sales volumes in January was puzzling. The series
was volatile, and the reading could prove to be erratic. None of the other available survey indicators of
retail spending pointed to a similar decline. Indeed, the CBI <i>Distributive Trades Survey</i> balance in
January was around the level experienced in early 2004, though it had eased back since. Contacts of
the Bank's regional Agents had not suggested any easing in retail sales in January. Moreover, the
BRC/KPMG measure of total retail sales on a year earlier rose in both January and February.
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mpc: 15. There were some signs that the housing market might be slowing. The three-month-on-three-
month rate of inflation for the average of the lenders' house price indices had fallen again to 2.6% in
February, down a percentage point from December. Moreover, a number of the indicators in the
preview of the Royal Institution of Chartered Surveyors' survey for February had continued to ease.
The survey balances for site visits and net reservations were also down sharply in January, according
to the Home Builders Federation.
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mpc: 16. The continued strength of the world economy, and particularly the euro area, appeared to have
been reflected in strong export growth. The CIPS/RBS manufacturing export orders index rose in
February to its highest level since January 2004. And the February CBI <i>Monthly Trends</i> export orders
balance rose to well above its average since 1997.
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mpc: 17. Broad money and credit growth continued to expand rapidly in January, with annual growth of
M4 and M4 lending (excluding the effects of securitisations) at 13.0% and 15.5% respectively.
<h4>Costs and prices </h4>
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mpc: 18. The employment rate had been flat in 2006 Q4. The Labour Force Survey unemployment rate
was down marginally. A measure of labour market tightness that weighted those who were not
employed by their likelihood of finding a job was flat. The near-term outlook for employment growth
was rather mixed according to surveys, with some of the surveys weakening and some strengthening.
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mpc: 19. A little more data on whole-economy settlements had emerged during the month. With about
15% of the expected final sample now in for January, the mean settlement of 3.3% was about 0.5%
higher than in January 2006. But when only those settlements matched by organisation were
compared for 2006 and 2007, the mean was unchanged at 3.6%, though the sample was even smaller.
Either way, these numbers did not obviously represent a threat to the inflation target. Private sector
regular pay growth remained at 3.8% in December. Increases in public sector pay announced by the
Chancellor for later this year were restrained. The National Minimum Wage would be raised by less
than last year. Taken together, these developments suggested that the upside risks from pay that had
previously concerned the Committee appeared to have diminished somewhat.
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mpc: 20. The Committee had known at its February meeting that CPI inflation had been 2.7% in January
- significantly lower than expected. But it had not been able to conduct any analysis of the CPI data
until this month. As a result, the Committee now thought it possible that inflation might come out a
little lower in the short term than the <i>Inflation Report </i>central projection implied. The cuts in utility
prices announced so far seemed to be broadly in line with those embodied in the February <i>Inflation </i>
<i>Report</i> forecast, though the Committee had also assumed that there would be further reductions later in
the year.
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mpc: 21. Annual rates of import and manufacturing input price inflation had slowed, both including and
excluding energy. Measures of manufacturers' output price inflation had been broadly flat on the
month, though the trend excluding petroleum products had been upwards over a number of years.
Services price inflation eased. Some of the monthly business survey measures of price pressures also
fell slightly in February. But they remained high when compared with recent historical averages.
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mpc: 22. The Bank's survey measure of households' inflation expectations remained at 2.7% in February,
and the Citigroup/YouGov measure had fallen back to 2.4%.
<h4>The immediate policy decision </h4>
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mpc: 23. In the February <i>Inflation Report,</i> the Committee's central projection had been for GDP growth
to expand at a rate close to its average of the past decade. The risks were broadly balanced around that
view. The central projection was for inflation to fall back below the 2% target during the first year,
but then to settle at around the target over the medium term. The balance of risks to inflation was
judged to be weighted to the downside in the near term, and to the upside in the medium term. Those
projections had been based on market yields that implied at least one more increase in Bank Rate in the
next twelve months. There had been a range of views among members about the central case and what
weight to put on the different risks.
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mpc: 24. The Committee discussed how the news over the month had affected their views on the outlook
and hence the appropriate level for Bank Rate. There had been some major movements in financial
markets during the month. Equity prices had been volatile and ended the month a little down. Credit
spreads had widened. But the news from financial markets was not all downside for activity and
inflation. Market interest rates on less risky assets had fallen. The sterling ERI had declined. Oil spot
and futures prices had risen. It was possible that the net effect of these developments by themselves
could be to push up the inflation projection a little.
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mpc: 25. The Committee noted that, in the official data, manufacturing output had fallen slightly in
January, but energy output had risen quite sharply. Surveys were consistent with firm overall output
growth in the first quarter. Taking these data together, the Committee judged that GDP growth was
still likely to be as strong in 2007 Q1 as expected at the time of the February <i>Inflation Report</i>.
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mpc: 26. The Committee discussed whether household spending was slightly weaker at the start of the
year than was previously expected, though it was too soon to draw firm conclusions. Retail sales had
fallen in January, according to the ONS, though other indicators of retail spending had been more
robust. At least part of the rise and fall in the official series around Christmas probably represented
data volatility. Smoothing through that volatility gave a more subdued picture of underlying consumer
spending than had been the case last month. Developments in the housing market may also have been
a signal that households were beginning to rein in their spending. House price inflation might have
begun to slow, and some activity indicators were consistent with an easing in the growth of housing
demand.
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mpc: 27. Business investment had grown strongly and by more than the Committee had expected. But
some of that growth, which the Committee judged to be temporary, came from the energy sector.
Business investment growth was likely to ease back to be more in line with the still buoyant path
underlying the Committee's central projection in the February <i>Inflation Report.</i>
<i> </i>
28. The news from the United States had probably been to the downside for the Committee over the
month, though not by enough to change its views on the outlook for the US economy to a significant
extent. By contrast, data for the euro area, the United Kingdom's main trading partner, had surprised
on the upside. Euro-area growth in 2006 Q4 had been higher than anticipated at the time of the
February <i>Inflation Report</i>. And the Committee judged that surveys of output pointed to further firm
growth in 2007 Q1.
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mpc: 29. The Committee had previously been concerned about the prospective impact of high RPI and
CPI inflation on inflation expectations and on wages. The initial recorded outturns for recent wage
settlements and relatively subdued inflation expectations led the Committee to judge that the upside
risk to inflation from wage growth might have started to diminish.
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mpc: 30. Some cost pressures had eased: import price inflation had fallen back to its lowest level since
2004; and manufacturers' input price inflation had also declined. But manufacturers' output price
inflation had remained high, both according to official measures and business surveys. That may have
been indicative of demand pressures in world markets as well as in the United Kingdom. But it might
have reflected the delayed pass-through of earlier increases in energy prices. Business survey price
expectations were also high in other sectors of the economy.
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mpc: 31. The short-term outlook for inflation was now a little lower than in the February <i>Report</i>,
following the publication of the January CPI data. The announcements on consumer utility prices had
been, in aggregate, broadly as expected. But the Committee had anticipated further reductions later in
the year, and members were still uncertain about whether these would happen.
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mpc: 32. For one member, the balance of news since the February <i>Inflation Report</i> had been to the
downside and therefore had increased the scope for a small monetary relaxation. For that member,
there was considerable evidence of spare capacity in the labour market, and wage pressures were
benign. The degree of monetary tightening, in conjunction with benign wage inflation, had started to
push down consumption and housing market activity. The service sector looked a little weaker this
month. Inflation was likely to decline faster in the short term than in the Committee's central
projection.
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mpc: 33. For most of the Committee, the news on the month was a little on the downside. Nevertheless,
they remained concerned that the risks to inflation over the medium-term remained on the upside, as in
the February <i>Inflation Report</i> projection. Although the risks to pay growth had not materialised in the
data available so far, capacity utilisation within firms remained elevated. Business surveys continued
to show strong pricing intentions. Sterling had depreciated and oil prices had risen. Money growth
had eased in recent months, but it remained strong. Looking at the balance of risks, these members
were content to leave rates unchanged this month.
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mpc: 34. For most members, the financial market volatility added to the case for holding rates this month.
Although some market participants were expecting an increase in Bank Rate this month, the majority
were not. An unexpected move by the Committee could provide an unwelcome addition to the
uncertainty and volatility in financial markets.
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mpc: 35. The Governor invited the Committee to vote on the proposition that Bank Rate should be
maintained at 5.25%. Eight members of the Committee (the Governor, Rachel Lomax, John Gieve,
Kate Barker, Charles Bean, Tim Besley, Andrew Sentance and Paul Tucker) voted in favour of the
proposition. David Blanchflower voted against, preferring a reduction in Bank Rate of 25 basis points.
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mpc: 36. The following members of the Committee were present:
http://mpc.theyserveforyou.com/meetings/2007/3/7/48
mpc: Mervyn King, Governor Rachel Lomax, Deputy Governor responsible for monetary policy John Gieve, Deputy Governor responsible for financial stability Kate Barker Charles Bean Tim Besley David Blanchflower Andrew Sentance Paul Tucker Jon Cunliffe was present as the Treasury representative.<h4> </h4>
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mpc: </BODY>
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mpc: <h4>MINUTES OF THE MONETARY POLICY COMMITTEE MEETING HELD ON 4-5 APRIL 2007</h4> 1
At the start of the meeting, the Committee noted a letter from the Chancellor (attached as an
annex) setting out the remit for the Committee over the following year, in accordance with Section 12
of the Bank of England Act. Before turning to its immediate policy decision, the Committee discussed
developments in financial markets; the international economy; money, credit, demand and output;
and supply, costs and prices.
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mpc: <h4>Financial markets </h4>
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mpc: 2
The past month had seen an unwinding of most of the falls in equity prices that had occurred in
the period leading up to the March MPC meeting. The FTSE All-Share index had risen 3½% on the
month, leaving it 2% up on the level at the time of the February <i>Inflation Report</i>. There had been
similar movements in the euro area and the United States. By contrast, less than half of the rise in sub-
investment-grade corporate bond spreads had been reversed over the month, although the remaining
rise was small when set against the substantial fall in spreads over the past few years.
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mpc: 3
The Committee discussed whether the financial market turbulence of the past few weeks had
reflected heightened concerns about US economic prospects and/or a general re-pricing of risk. Since
the asset price movements had been seen across various international financial markets, that might
point to global factors rather than US-specific ones. However, the two explanations did not need to be
seen as alternatives. It seemed possible that a number of pieces of downside news in the United States
had coincided with growing concerns about the US sub-prime mortgage market, and might have led
investors to believe that the world was riskier than they had hitherto thought. The rapid reversal of
asset price falls had suggested that there were limited implications for the outlook for UK inflation.
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mpc: 4
Short-term interest rates had picked up internationally. Euro-area interest rate expectations had
risen over the month to end the period where they had been in early February. In the United States the
rise still meant that an interest rate cut was expected by the autumn. In the United Kingdom, short-
term interest rates had risen around 20 basis points over the month, and implied that the financial
markets were pricing in one rise in Bank Rate by the summer. That left the path for short-term interest
rates a little below that at the time of the February <i>Inflation Report</i>. Of the 60 City economists polled
by Reuters this month, 11 had been expecting an immediate rise in rates, and 35 had predicted a rise in
May. Only one person expected more than one increase. The median view had been that any rise in
Bank Rate in Q2 would be reversed by early next year. Further along the yield curve, there had been a
15-25 basis point rise in real forward interest rates internationally.
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mpc: 5
In the foreign exchange markets, there had also been a reversal of some of the sharp movements
seen in the previous month, particularly for the yen. Partly reflecting this, the sterling effective
exchange rate index (ERI) had appreciated by 1% over the month, though it remained around 2%
down on the level at the time of the February <i>Inflation Report</i>. Relative interest rate movements, and
such evidence as there was on speculative positions, had appeared to be broadly consistent with the
strength of sterling prior to February, and its subsequent depreciation. Despite the volatility of the past
few months, sterling was currently within the broad range that it had traded in for much of the past ten
years. Option prices suggested there had been an increase in the demand for protection against a yen
appreciation with respect to a number of currencies including sterling.
http://mpc.theyserveforyou.com/meetings/2007/4/4/16
mpc: <h4>The international economy </h4>
http://mpc.theyserveforyou.com/meetings/2007/4/4/17
mpc: 6
GDP growth in the United States had been unrevised at 0.6% in 2006 Q4, though that had been
somewhat weaker than expected at the time of the February <i>Inflation Report</i>. Some of the short-term
activity indicators had pointed to growth below potential. The Institute of Supply Management (ISM)
manufacturing business activity index had eased in March, taking it back to its Q4 average, and the
non-manufacturing index had eased further to 52.4 the weakest since April 2003. In contrast, non-
farm payrolls growth had remained firm.
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mpc: 7
The focus of commentary on the United States economy in the past few weeks had been on the
sub-prime mortgage market. Sub-prime mortgages constituted around 10%-15% of the market, and
the proportion of those loans in arrears of 30 days or more had picked up to around 13% of sub-prime
borrowing in 2006 Q4. Around a third of sub-prime mortgages were due to have their interest rates
reset upwards this year, so it was probable that delinquency rates would rise. But the direct impact of
these developments on the wider economy seemed likely to be moderate. The affected households
constituted a small proportion of the total, and these were likely to be low-income households, whose
impact on aggregate spending would be correspondingly low. The latest consumption indicators
pointed to healthy Q1 growth of nearly 1%, while consumer confidence indicators did not point to
deteriorating prospects.
http://mpc.theyserveforyou.com/meetings/2007/4/4/19
mpc: 8
Potentially of wider significance was the incipient weakness in US non-residential investment.
That had fallen in Q4, and given the turndown in durables goods orders and shipments this year, also
looked likely to have declined in Q1. If so, it would represent the first consecutive quarterly declines
in non-residential investment for four years. The weakness looked puzzling given high levels of
capacity utilisation and the profit rate.
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mpc: 9
The picture for the rest of the world was robust, suggesting a continuing broad rebalancing of
growth. Economic activity in Asia had been strong. In the euro area, both the manufacturing and non-
manufacturing Purchasing Managers Indices (PMIs) had dipped in March, but remained consistent
with above-potential output growth in Q1. The latest data suggested that the VAT increase in
Germany at the turn of the year had had little effect on output. Although there had been some
structural improvements in some euro-area countries, the most likely explanation of more rapid output
growth in recent quarters was a cyclical recovery. There had been signs of more sustained investment
growth, and labour market conditions were supportive of stronger consumption growth: employment
had been rising and unemployment had been falling for some time.
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mpc: 10 Inflation in the United States had edged up to 2.4% in February on the Federal Reserve's
preferred core measure of the personal consumption expenditures deflator. Headline consumer price
inflation in the euro area had been 1.9% in March.
http://mpc.theyserveforyou.com/meetings/2007/4/4/22
mpc: 11 Spot oil prices had risen further and were up around 10% on the month as a whole, though the
movement in the futures curve was less. Spot and futures oil prices were higher than assumed in the
February <i>Inflation Report.</i> Some of the rise appeared to have been related to the political tensions in
the Middle East. Continued volatility appeared likely as conditions in the oil market seemed set to
remain tight, and it would take considerable time for the rise in prices over the past few years to feed
through to increased production capacity. In the United Kingdom, the mild winter and improved
supply had prevented a reoccurrence of the sharp rise in wholesale gas prices seen the previous year.
Other international commodity prices, such as those of metals and food, had also been rising in recent
months.
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mpc: <h4>Money, credit, demand and output </h4>
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mpc: 12 UK GDP growth had been revised down to 0.7% in Q4, compared with 0.8% in the previous
release. There were also some revisions to earlier quarters, leaving the level of current output largely
unaffected and the annual rate of growth unchanged at 3.0%. Turning to Q1, the CIPS/RBS services
balances for business activity and new orders had been little changed in March and, although still
strong, had been below the peak readings of late 2006. The corresponding manufacturing balances had
fallen in March, while the ONS estimate of manufacturing output had been a little weaker than
expected in February. But overall, the picture for Q1 GDP growth looked similar to Q4, except that
output growth was likely to be temporarily boosted by output from a new oil field which had come into
production earlier than expected. That might suggest that Q1 output growth had been a little above
that expected at the time of the February <i>Inflation Report</i>.
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mpc: 13 Turning to the demand counterparts, the revised data suggested a continuation of the volatility of
consumption growth over the past year, but the underlying picture had not changed substantially.
Retail sales had rebounded in February as expected, and the Bank's regional Agents and the CBI
<i>Distributive Trades Survey</i> had pointed to a firm picture for retail sales in March.
http://mpc.theyserveforyou.com/meetings/2007/4/4/26
mpc: 14 Some slowing in consumption growth might be expected in response to slowing household
income growth and rising interest rates. An indicator of softer consumption growth might be the
slower annual growth of unsecured lending, with the latest information provided to the Bank by
lenders suggesting that there had been some tightening in unsecured credit supply conditions.
Consumer confidence was also relatively subdued, although the link to consumption had not been
particularly good in the past.
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mpc: 15 The average of the lenders' indices for Q1 indicated that house prices had risen by around 2½%,
though it had turned out a little lower than had been expected at the time of the February <i>Inflation </i>
<i>Report</i>. A number of indicators, such as the Royal Institution of Chartered Surveyors' measure of the
sales-to-stock ratio, were still tight. Secured lending had remained buoyant in February, but other
housing market indicators were mixed.
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mpc: 16 Prospects for business investment appeared buoyant; growth had been revised up to 4.5% in Q4,
and there had been upward revisions to earlier data. The sectoral pattern of growth pointed to broad-
based strength. Moreover, outside the energy sector, the rate of profitability had risen to 14.7% in Q4,
the highest since the series began in 1989. That should help to sustain investment. The Bank's
regional Agents' service sector score for investment had been at its highest level since it started in
1997.
http://mpc.theyserveforyou.com/meetings/2007/4/4/29
mpc: 17 The Budget had included reductions in capital allowances with effect from April 2008. While
the net effect of the changes on the capital stock might be small in the long run, it might induce firms
to bring forward planned spending into this year. Otherwise, a preliminary assessment suggested that
the macroeconomic impact of the Budget would be broadly neutral, taken over the next few years as a
whole, compared with the 2006 <i>Pre-Budget Report</i>. The Committee would want to process the
detailed spending and tax plans more fully in the context of its May <i>Inflation Report.</i>
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mpc: 18 The survey data for exports had pointed to a more positive picture than the official data. The net
trade contribution to GDP growth in Q4 had been revised, and was now close to zero. Moreover, the
large negative contribution to GDP growth from the alignment adjustment suggested that this might be
further revised downwards. The recorded current account deficit had increased to 3¼% of GDP in
2006.
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mpc: 19 Broad money and credit continued to expand rapidly in February, with annual growth of M4 and
M4 lending (excluding the effect of securitisations) at 12.7% and 15.2% respectively.
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mpc: <h4>Supply, costs and prices </h4>
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mpc: 20 Employment among the 16-59/64 age group had fallen slightly in the three months to January
according to the Labour Force Survey (LFS), with the employment rate ticking down 0.1 of a
percentage point. However, the unemployment rate had remained flat, reflecting lower
participation/higher inactivity. Measures of weighted non-employment had been broadly stable over
the second half of 2006. There had been a rise in the number of part-time workers who wanted a full-
time job and temporary workers who wanted a permanent job.
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mpc: 21 The various measures of labour market tightness extracted from surveys had continued to tell
somewhat different stories about the amount of slack in the labour market at the current conjuncture,
and did not provide clear signals as to whether the labour market was tightening or loosening. In
particular, there had been distinct differences in the perceived skill shortages across sectors. It was
possible that the situation had been clouded by greater availability of migrant workers in recent years.
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mpc: 22 The three-month AEI-weighted measure of whole economy settlements had been around 3.3% in
February. With just under a third of the settlements normally expected for January now collected, and
February being a relatively quiet month, the picture on pay settlements looked similar to that at the end
of last year. Annual growth in regular pay edged down in the three months to January to 3.6%. There
had been a pickup in overall earnings growth in January to 4.2%, which reflected bonuses. The ONS
had suggested that some of the companies paying bonuses in January this year might have paid them in
February last year. Smoothing through the bonus contribution suggested that whole economy earnings
growth had remained broadly flat at around 4%. So the data continued to suggest that so far there had
been little pickup in pay pressures.
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mpc: 23 Excluding food, beverages, tobacco and petroleum, manufacturing output price inflation had
picked up to 2.7% in February. The latest available official estimate for services producer output price
inflation had been 3% in 2006 Q4. Movements in the surveys of producer prices had been mixed on
the month, but the balances generally remained high, in line with the official data and suggesting that
output price inflation would continue at close to recent rates in the near term.
http://mpc.theyserveforyou.com/meetings/2007/4/4/37
mpc: 24 The Bank's regional Agents had conducted a special survey on pricing intentions over the next
twelve months. This suggested rising inflation in consumer services, moderating inflation in
manufacturing, and flat prices in retailing. But retailers were also expecting margins to rise, despite an
expected rise in costs of the domestic producers. There were a variety of ways in which these
apparently different expectations for prices could eventually be reconciled: for example, through
changes to the quantity and/or price of imported retail goods, or through changes in retailers' other
costs. But further investigation by the Agents was needed.
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mpc: 25 CPI inflation had picked up to 2.8% in February. That reversed some, but not all, of the
aggregate news in the previous month's release. Inflation was now more in line with the February
<i>Inflation Report</i> projection. The near-term outlook would be affected by the rise in oil prices over the
past month. The YouGov/Citigroup measure of expected inflation over the next 12 months had risen
to 2.5% in March, and had continued to show signs of being correlated with actual outturns for
inflation in recent months.
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mpc: <h4>The immediate policy decision </h4>
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mpc: 26 Financial market asset prices had largely bounced back from their falls the previous month,
although credit spreads remained wider. UK short-term interest rate expectations were a little below
where they were at the time of the February <i>Inflation Report</i>. In contrast, the exchange rate had
appreciated a little over the past month, but was down around 2% compared with the time of the
previous <i>Report</i>.
http://mpc.theyserveforyou.com/meetings/2007/4/4/41
mpc: 27 The world economy had remained robust. There were further signs of the recovery in the euro
area becoming more entrenched, with investment strengthening, and conditions in place for faster
consumption growth looking ahead. By contrast, there had also been signs of greater vulnerabilities in
the United States.
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mpc: 28 At the time of the February <i>Inflation Report</i>, the Committee's central projection had been for
GDP growth to expand at a rate close to its average of the past decade, with broadly balanced risks
around that. The official data for UK GDP growth had been revised slightly through 2006, but the
picture remained one of steady growth.
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mpc: 29 There was evidence of a shift in the balance of domestic demand, with further strength of
business investment. But consumption had remained volatile. Some indicators suggested that the
likely near-term outlook for consumption spending was weaker than expected at the time of the
February <i>Inflation Report</i>, though there had also been a bounce back in retail sales over the previous
month. There had been a tightening of unsecured credit conditions and income was looking weaker,
though this weakness might be temporary. House price inflation had probably slowed at the end of last
year. But the housing market indicators were not giving clear signals as to what might happen next,
and the outturn for house price inflation in Q1 was still high, even though it had been lower than
expected.
http://mpc.theyserveforyou.com/meetings/2007/4/4/44
mpc: 30 Weaker real labour income in part a reflection of weaker-than-expected employment growth
was one reason to expect a dip in consumption growth in Q1. Some members found it puzzling that
the continued capacity pressures recorded in surveys had not as yet fed through into faster private
sector employment growth. One possibility was that firms were still adjusting to the rise in energy
prices, so that some further downward adjustment to the level of real take-home pay of employees was
still required, and this was weighing on employment growth. But the continued volatility of energy
prices made the degree of adjustment difficult to assess.
http://mpc.theyserveforyou.com/meetings/2007/4/4/45
mpc: 31 Pay developments had continued to be relatively benign, with no significant rise in settlements
over the winter months, and total earnings growth had remained flat after allowing for the volatility of
bonus payments. It was possible that the greater availability of migrant labour, both skilled and
unskilled, had reduced the response of pay to activity. It was likely that pay was a lagging indicator of
activity. There was uncertainty about the degree of slack in the labour market and there were varying
views among the Committee.
http://mpc.theyserveforyou.com/meetings/2007/4/4/46
mpc: 32 CPI inflation had remained volatile. It had risen in February, and this had offset most of the
downside news in January, leaving the near-term outlook for inflation not very far from that expected
at the time of the February <i>Inflation Report</i>. Surveys of inflation expectations had continued to follow
actual movements in inflation recently. Oil and some other commodity prices had risen further over
the past month. Changes in the prices of gas and electricity continued to have a material impact on the
prospective near-term profile for CPI inflation. The announcements made by utility companies so far
had been broadly in line with the assumptions made at the time of the February <i>Inflation Report</i>.
http://mpc.theyserveforyou.com/meetings/2007/4/4/47
mpc: 33 For some members, there was no compelling case for a change in interest rates this month. For
these members there were particular uncertainties about the outlook for the US economy and for UK
consumption. The evidence on the degree of slack within firms and in the labour market did not
suggest a clear need to raise interest rates. There remained both upside and downside risks to the
prospects for inflation, but the near-term prospect was of a fall in inflation towards the target in the
next few months. It would be particularly useful to process the news in the context of the May <i>Report.</i>
http://mpc.theyserveforyou.com/meetings/2007/4/4/48
mpc: 34 Other members also concluded that no change in Bank Rate was warranted this month, but that
the balance of risks to inflation remained on the upside in the medium term, as had been highlighted in
the February <i>Report</i>. Domestic demand continued to grow robustly. Manufacturing and service sector
producer price inflation was running at an annual rate of around 3% an unusual conjunction. If that
were to persist for any length of time, it seemed incompatible with achieving the inflation target in the
medium term. Nevertheless, there was only a limited expectation of a move in Bank Rate this month,
and a rise might lead to an unwarranted upward shift in the yield curve. Any change would also be
better explained in the context of the May <i>Inflation Report</i> projections.
http://mpc.theyserveforyou.com/meetings/2007/4/4/49
mpc: 35
Some other members also thought that the balance of risks to the outlook to inflation was on the
upside, and that these were sufficiently strong to warrant an immediate rise in Bank Rate of 25 basis
points. These members thought the fundamental determinants of consumption remained firm, that
business investment and global demand were strong, and that profitability was very healthy. Survey
evidence suggested a shift in sentiment on the part of firms about their ability to push through price
increases. So overall, demand pressures were likely to add to existing tight capacity pressures, slowing
the reduction in CPI inflation in the short-term and adding to medium term risks. Developments in
money, credit and asset prices also posed an upside risk to inflation in the medium term.
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mpc: 36 The Governor invited the Committee to vote on the proposition that Bank Rate should be
maintained at 5.25%. Seven members of the Committee (the Governor, Rachel Lomax, John Gieve,
Kate Barker, Charles Bean, David Blanchflower and Paul Tucker) voted in favour of the proposition.
Tim Besley and Andrew Sentance voted against, preferring an increase in Bank Rate of 25 basis
points.<h4> </h4>
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mpc: 37 The following members of the Committee were present: Mervyn King, Governor Rachel Lomax, Deputy Governor responsible for monetary policy John Gieve, Deputy Governor responsible for financial stability Kate Barker Charles Bean Tim Besley David Blanchflower Andrew Sentance Paul Tucker Dave Ramsden was present as the Treasury representative.
http://mpc.theyserveforyou.com/meetings/2007/4/4/52
mpc:
http://mpc.theyserveforyou.com/meetings/2007/5/9/11
mpc: <h4>MINUTES OF THE MONETARY POLICY COMMITTEE MEETING HELD ON 9-10 MAY 2007</h4> 1
Before turning to its immediate policy decision, and against the background of its latest
projections for output and inflation, the Committee discussed financial markets developments; the
international economy; money, credit, demand and output; and costs and prices.
http://mpc.theyserveforyou.com/meetings/2007/5/9/12
mpc: 2
On 17 April, the Office for National Statistics had published data showing that CPI inflation in the
12 months to March had been 3.1%. As this was more than one percentage point higher than the
Committee's target, the Governor had written an open letter to the Chancellor, as required by the remit
for the Committee. The purpose of the letter was to explain why inflation had risen above target and
what the Committee proposed to do in response. The Governor's letter referred to the Committee's
central expectation that inflation would fall back to around the 2% target over the course of the year.
The Governor's letter and the Chancellor's reply were both published at 10.30am, one hour after the
CPI data.
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mpc: <h4>Financial markets </h4>
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mpc: 3
The market reaction to the publication of the CPI data had been a rise in UK short-term interest
rates of up to 10 basis points. But, by the end of the day, forward rates beyond the end of 2008 had
returned to around their opening levels. Over the month as a whole, short-term interest rates had risen
by around 10 basis points. A rise in Bank Rate of 25 basis points had been fully priced-in for the May
meeting and a further rise was implied for later in 2007.
http://mpc.theyserveforyou.com/meetings/2007/5/9/15
mpc: 4
Short-term interest rates in the euro area had also risen steadily on the month and market
expectations were consistent with two further rate rises in 2007. US short-term rates had risen by
around 15 basis points early in April, after stronger-than-expected non-farm payrolls data, but had been
volatile thereafter. Markets had previously been pricing in a possible cut in US rates in 2007 and this
expectation appeared to have diminished. Movements in long-term interest rates had been modest, with
UK and euro-area rates slightly higher on the month and US and Japanese rates slightly lower.
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mpc: 5
In foreign exchange markets, the sterling effective exchange rate index (ERI) had appreciated by
around ½% on the release of the CPI data but, by the time of the May MPC meeting, was a little lower
than at the April meeting. The ERI had fallen by around 2% since the February <i>Inflation Report</i> and
was back to around its level at the start of the year. This was despite the weakness of the dollar against
which sterling had recorded a 25-year high on 17 April.
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mpc: 6
Equity prices had risen by 3-5% on the month in the United Kingdom, the United States and the
euro area and had largely reversed their sharp falls in late February and early March. It was perhaps
puzzling that US equity prices had been so strong given the mixed news about the US economy but
there had been positive news on corporate earnings recently, perhaps in part boosted by the weakening
currency raising the dollar value of overseas earnings. Spreads on sub-investment grade corporate
bonds had narrowed.
http://mpc.theyserveforyou.com/meetings/2007/5/9/18
mpc: <h4>The international economy </h4>
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mpc: 7
There had been little news on the euro area during the previous month, but what data there had
been continued to be consistent with robust growth. Retail sales had been flat in the first quarter,
although this was probably a temporary reaction to the VAT increase in Germany. The Purchasing
Managers Indices for both manufacturing and services remained at relatively high levels, although the
latter had declined slightly in April. The early estimate of euro-area CPI had suggested a fall in the
inflation rate to 1.8% in April.
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mpc: 8
The recent US data had been mixed. GDP growth in the first quarter had been estimated at just
0.3%. Within the expenditure components, consumption growth had been strong at 0.9%. But non-
residential investment had grown by only 0.5% and government expenditure growth had slowed. There
had also been a large negative contribution from residential investment, which had fallen by 4.6%, and
a smaller negative contribution from net trade. The Institute for Supply Management (ISM) indices for
April had risen strongly for both manufacturing and services, consistent with the possibility of
somewhat firmer GDP growth in the second quarter. But downside risks to consumption were signalled
by subdued housing activity, rising petrol prices and slowing employment growth.
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mpc: 9
Slower growth in the US did not seem to have spilled over into the rest of the world. Indeed,
Asian countries such as China and India continued to have high growth rates. Early estimates of
Japanese industrial production had fallen in the first quarter but the overall outlook remained robust.
Asset prices were buoyant in many financial markets. With signs of higher inflation in a number of
emerging market economies there was, perhaps, rather less sign of disinflationary pressure than hitherto.
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mpc: 10 Oil prices had fallen on the month but the 15-day average of sterling spot oil prices used as the
starting point for the May<i> Inflation Report</i> forecast was some 17% higher than the corresponding
starting point for the February <i>Report</i>. Industrial metal prices had also risen strongly. In contrast, the
prices of basic foodstuffs had decelerated sharply in recent months.
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mpc: <h4>Money, credit, demand and output </h4>
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mpc: 11 The ONS' provisional estimate of Q1 GDP growth had been 0.7%, with service sector output
having grown by 0.8%, energy output by 1.4% and manufacturing having contracted by 0.3%. In
contrast, business surveys and reports from the Bank's regional Agents had suggested somewhat
stronger activity in manufacturing and indicators of capacity pressures had remained elevated. The CBI
<i>Industrial Trends Survey</i> had recorded the lowest proportion of manufacturers citing a lack of orders or
sales as a constraint on output since 1989.
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mpc: 12 The Committee considered a number of possible explanations for the divergence between the
ONS data and other evidence on manufacturing. Based on past experience, it was likely that the
provisional Q1 GDP estimates would be revised up. It was also possible that the surveys and the
Bank's Agents might be over-optimistic because they did not pick up small or failing firms.
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mpc: 13 The CIPS/RBS surveys for April had been consistent with robust output growth in the second
quarter. The services business activity index had fallen a little but the balance for incoming new
business had been slightly stronger: both indices remained above their averages since the survey was
introduced 11 years previously. The manufacturing output survey balance also rose to above its average
level.
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mpc: 14 Demand indicators had been consistent with firm consumption growth, with retail sales volumes
in the first quarter over 4% higher than a year earlier, although quarterly growth had been only 0.4%. In
the second quarter, the CBI <i>Distributive Trades Survey</i> for April showed the highest balance of retailers
reporting an increase in sales since May 2004 with stocks falling to their lowest since the series began.
The British Retail Consortium data for April had been less strong although still consistent with steady
consumption growth.
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mpc: 15 Housing market data had been mixed. The average of the lenders' house price indices had risen
by 1% in April, although some of the March activity data such as loan approvals and site visitors
had weakened. It was possible that the housing market was cooling slightly and that house price
inflation would slow. The Committee noted that the 75 basis points rise in Bank Rate since mid-2006
had not been reflected fully in the average effective mortgage rate, which had only increased by about
half of the change in Bank Rate. This may have partly reflected the high and rising proportion of fixed
rate mortgages over the past few years, which now accounted for over 50% by value of the stock of
mortgages outstanding. Unsecured lending growth including credit cards had continued to slow,
while growth in secured lending had been rising. That might be one explanation as to why the spread
between unsecured and secured lending had narrowed as Bank Rate had risen.
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mpc: 16 Investment intentions appeared to be a bit weaker for manufacturing and a bit stronger for
services according to both the CBI and BCC surveys. Capital goods orders usually a reasonable
leading indicator of business investment had picked up in the latest CBI <i>Industrial Trends Survey</i> but
had fallen sharply in the April CIPS/RBS survey.
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mpc: 17 The BCC, CIPS/RBS and CBI surveys had all recorded slightly weaker export balances although
the implied growth of exports remained reasonably firm, despite sterling's appreciation over the
previous year.
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mpc: 18 Broad money, as measured by M4, continued to grow at around 13% in the 12 months to March.
Household M4 growth was steady at just over 8%, while `other financial companies' broad money
holdings were still rising at nearly 25%. Credit growth also remained strong with M4 lending
(excluding securitisations) growing at 14½% in the 12 months to March, with lending to individuals
growing at just over 10%. The growing household debt burden and hence rising income gearing, meant
that there was an increasing potential impact on household income if interest rates had to rise
significantly from current levels.
<h4>Costs and prices </h4>
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mpc: 19 Employment had fallen by 47,000 in the three months to February on the Labour Force Survey
measure, with a fall in employees only partly offset by rising self-employment. The employment rate
was at its lowest level for over two years at 59.9%. But declining participation rates had left the
unemployment rate constant at 5.5%. The continued weakness in employment was a bit puzzling after
five consecutive quarters of firm output growth. The Committee considered a number of possible
explanations.
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mpc: 20 The data might be inaccurate either output growth having been weaker than reported or
employment growth stronger. An over-recording of GDP growth seemed less likely given the
supporting strength of the business surveys. Data inaccuracies might arise just from sampling error or
they could arise from systematic misreporting. An example of the latter would be migrant workers
displacing domestic workers but not being picked up in the ONS surveys. Another possible explanation
could be that the data were accurate, but public sector employment might be falling so that the
behaviour of private sector employment would then be more consistent with that of output. There were
insufficient data yet on the split between public and private sectors for the first quarter to check this
hypothesis, although public sector employment had fallen back slightly in the fourth quarter of 2006.
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mpc: 21 Another way to square the output and employment data would be if firms were not taking on as
much labour whether because of regulatory burdens, a mis-match between skills required and those
available, or because of genuine productivity improvements. It was not clear what might have
happened recently to generate any of these outcomes, but the observed increase in average hours
worked would be consistent with the first two of these explanations for why employment growth was so
muted. Measured productivity growth in the private sector had been picking up but this might just
reflect a normal cyclical recovery. Another possibility was that there was more slack in the economy
and demand pressures had been over-estimated.
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mpc: 22 With a third of the pay settlements expected in the first quarter now known, the level of
settlements remained little changed from the fourth quarter. For January, the mean level was 3.3%,
broadly in line with November and December. For February, the latest estimate was 3.5% and the
initial estimate based on just a few awards for March was 3.1%. Annual regular pay growth had eased
back to 3.6% in the three months to February, although higher bonuses (linked mainly to the financial
services sector) had boosted overall average earnings growth to 4.6%.
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mpc: 23 Manufacturing input and output price inflation had both picked up a little in the 12 months to
March: even excluding food, drink, tobacco and petroleum products, output price inflation had risen
from 2.7% to 2.9%. Survey measures of pricing in manufacturing also remained elevated although
different surveys gave a mixed indication of recent changes. The picture was somewhat clearer in
services, with falls in the CIPS/RBS and BCC prices balances. The Bank's regional Agents had
reported that retailers expected price increases over the next 12 months to be relatively subdued but
would seek to raise margins by cutting costs and by switching to higher margin items.
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mpc: 24 CPI inflation in March was 3.1%, with an unexpectedly strong upside contribution from
household goods prices in general and furniture in particular. The ONS had commented that this may
have been in anticipation of prospective discounting in the sales over the Easter period, in which case it
would unwind subsequently. In line with pre-release arrangements, an advance estimate of CPI
inflation of 2.8% in April had been provided to the Governor ahead of publication. This was consistent
with the Committee's central expectation that CPI was likely to fall back during 2007 as the sharp rises
in retail gas and electricity prices during 2006 dropped out of the 12-month inflation rate and announced
cuts were phased in.
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mpc: 25 Only one survey of the public's inflation expectations had been conducted since the release of the
CPI data: the Citigroup/YouGov survey had suggested that inflation expectations for the year ahead
were unchanged at 2½%.
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mpc: <h4>The May GDP growth and inflation projections </h4>
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mpc: 26 The Committee reached its policy decision in the light of the projections to be published in the
<i>Inflation Report</i> on Wednesday 16 May.
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mpc: 27 Conditional on market participants' expected path of interest rates, the Committee's central
projection was for UK GDP to continue to grow steadily at a rate close to its average over the past
decade. Growth was projected to be a little above that average in the early part of the projection
consistent with indications from business surveys and to edge down over the forecast period, as
business investment and government spending growth slowed. The profile was similar to that in the
February <i>Inflation Report</i>.
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mpc: 28 The risks around that central forecast for GDP were judged to be broadly balanced. On the
upside, domestic demand growth could be faster, perhaps supported by buoyant asset prices and,
associated with that, low long-term interest rates. And growth in the euro area or Asia might exceed
expectations. Key downside risks included the interaction of higher short-term interest rates with the
growing domestic debt burden and the possibility of slower growth in the United States triggering a
global slowdown.
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mpc: 29 The Committee's central projection was for CPI inflation to drop back in the first half of the
forecast period, dipping below the 2% target as the effect of lower domestic energy price inflation fed
through. Inflation was then projected to edge back up to target later in the forecast period, as the effects
of the energy price cuts fell out of the annual comparison. The May projection was similar to that
published in February, although the trough in inflation occurred a little later, reflecting in part stronger
upwards pressure in the near term from the higher oil price and the lower value of sterling.
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mpc: 30 There remained an unusual degree of uncertainty about the outlook for inflation, particularly in
the near term. The main risks included: the impact of stronger demand growth on companies' prices;
the evolution of inflation expectations; prospects for energy and import prices; and the degree of spare
capacity in the economy. Taken together, the risks were judged to be balanced in the near term, and
weighted to the upside in the medium term. There was a range of views on the Committee about both
the central projection and the balance of risks.
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mpc: <h4>The immediate policy decision </h4>
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mpc: 31 The Committee judged that there had been little news in financial markets over the month. The
main event had been the CPI data and the subsequent exchange of letters between the Governor and the
Chancellor. Financial markets and economic commentators now had a strong expectation that interest
rates would be raised by 25 basis points at the May meeting. Sterling had been little changed on the
month but was about 2% lower than the starting point for the February forecast.
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mpc: 32 The Committee considered that there had also been relatively little news about the international
environment over the month. Compared with the February <i>Inflation Report</i>, the US economy seemed a
little weaker than previously expected whereas the euro area seemed a little stronger. Japan appeared to
be reasonably firm and the other large Asian nations were growing strongly. Overall the global
economy continued to grow robustly. It was beginning to appear that there might be less disinflationary
pressure in the global economy than hitherto.
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mpc: 33 Oil and industrial metals prices had risen significantly since the February <i>Inflation Report</i>. The
Committee noted that the volatile movements in these prices, and their corresponding effects on the
economy, in the short run, made it much more difficult to look further ahead to assess medium-term
inflationary pressures.
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mpc: 34 Domestic demand and output growth had continued to be robust, although the ONS data on
manufacturing provided a somewhat weaker picture than the business surveys and the reports of the
Bank's regional Agents. Growth in the first half of 2007 was likely to be at, or a little above, its ten-
year average. Most housing activity indicators had shown some signs of slowing, though the most
recent house price data had remained strong. The full impact of the increases in Bank Rate since
August 2006 had not yet been passed through to average mortgage rates. Capacity utilisation measures
remained elevated, suggesting little spare capacity within firms. Overall, current indicators of UK
output growth were consistent with the Committee's previous projections.
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mpc: 35 The weakness of employment growth in the face of robust output growth was a puzzle. The
Committee had discussed a range of possible explanations and different members placed different
weights on the various possibilities. Nevertheless the Committee judged that there was probably still a
degree of slack in the labour market and, consistent with that, there had been little evidence to suggest
that pay growth had increased following the temporary increase in CPI inflation. Surveys suggested
that inflation expectations, although still a little above the 2% target, did not appear to have become
dislodged. Despite the high CPI inflation number for March, and some signs of rising producer price
inflation, it remained most likely that inflation would fall back to around the target during the course of
the year. Although the inflation outturns since the August 2006 <i>Inflation Report</i> had been close to the
Committee's forecast, there had possibly been more underlying inflationary pressure than expected.
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mpc: 36 The challenge for the Committee was to look through the near-term movements in CPI inflation
so as to judge the inflationary pressures over the medium term, where there was more than usual
uncertainty. The Committee's medium-term forecast was consistent with some immediate rise in
interest rates. For some members, the question was whether Bank Rate should be increased by 25 basis
points or whether there was a case for a rise of 50 basis points given the upside risks to inflation over
the medium term and the buoyant outlook for growth and demand.
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mpc: 37 The May <i>Inflation Report </i>forecast was conditioned on the market's expectations of interest rates
which implied an immediate increase of 25 basis points with a high probability of another rise later in
the year. If the Committee had been reasonably confident about the need for another interest rate rise
soon, then a strong case could have been made for an increase of 50 basis points this month. But those
members who had considered voting for 50 basis points preferred to wait for more data to assess the
impact of past increases in Bank Rate. Some members argued that, given the uncertainties around both
the outlook for inflation and the impact of interest rate changes, it was better to move cautiously. Other
members were concerned that any excessive movement in rates could create downside risks to growth
and so to the medium-term outlook for inflation. The Committee agreed that, should the economy
continue to develop broadly in line with the central expectation, Bank Rate could be raised further as
necessary.
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mpc: 38 The Governor invited the Committee to vote on the proposition that Bank Rate should be
increased by 25 basis points to 5.5%. The Committee voted unanimously in favour of the proposition.
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mpc: 39 The following members of the Committee were present: Mervyn King, Governor Rachel Lomax, Deputy Governor responsible for monetary policy John Gieve, Deputy Governor responsible for financial stability Kate Barker Charles Bean Tim Besley David Blanchflower Andrew Sentance Paul Tucker Jon Cunliffe was present as the Treasury representative.
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mpc: <h4>MINUTES OF THE MONETARY POLICY COMMITTEE MEETING HELD ON 4-5 JULY 2007</h4> 1
Before turning to its immediate policy decision, the Committee discussed developments in
financial markets; the international economy; money, credit, demand and output; and supply, costs
and prices.
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mpc: <h4>Financial markets </h4>
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mpc: 2
Market interest rates had increased markedly over the two months since the May <i>Inflation </i>
<i>Report</i>. Short-term sterling rates a year ahead had risen by around 50 basis points. Short-term rates in
the euro area and the United States had risen by a broadly similar amount by mid-June, but since then
had fallen back. The different path of UK rates in part reflected the <i>Minutes</i> published on 20 June,
since when market expectations of a rate rise at the July meeting had firmed. In the most recent
Reuters survey of 70 City economists, 56 had expected a rise in Bank Rate at the July meeting. The
sterling effective exchange rate had risen by around 0.5% on the month, broadly consistent with
changes in relative interest rates.
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mpc: 3
Longer-term interest rates had also risen further in the United Kingdom, the euro area and the
United States. Nominal 10-year forward rates had increased by 15-20 basis points since the June MPC
meeting and by some 30-40 basis points since the May <i>Inflation Report</i>. Implied volatilities from
options on 10-year US Treasuries had also risen, with the skew moving sharply to the upside. These
changes in nominal yields and volatilities had probably reflected revised views of market participants
about the risks to the outlook for the US economy. The change in nominal yields internationally had
been partly accounted for by a shift in real interest rates, with 10-year real forwards having risen by
10-15 basis points on the month and by 20-25 basis points since the May <i>Inflation Report</i>.
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mpc: 4
Implied inflation forward rates had also been increasing: 10-year UK inflation forwards were
some 10 basis points higher than at the time of the May <i>Inflation Report</i> and some 60 basis points
higher than two years previously, a rather greater rise than in the United States and the euro area. The
Committee discussed whether that necessarily indicated a rise in long-term expected inflation. The
inflation risk premium might have increased to reflect a perceived rise in the future volatility of
inflation. There might also be increased uncertainty about the difference between the CPI and the
inflation reference for index-linked bonds, the RPI. An alternative explanation was that the rise in
inflation forward rates reflected extraordinarily strong demand from pension funds for index-linked
bonds. This could have been consistent with a change in the value of the hedge against inflation
provided by index-linked bonds, rather than any change in views about the expected level of inflation.
There was little anecdotal information from long-term investment institutions that their inflation
expectations had risen.
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mpc: 5
Equity prices had been quite volatile internationally and most major indices had ended the
month slightly above their levels at the time of the June meeting. Investment-grade corporate bond
spreads were little changed but spreads on some riskier assets had widened: dollar-denominated
sub-investment grade bond spreads had increased by around 50 basis points. There had been renewed
concerns about the US sub-prime mortgage sector and the associated difficulties of some hedge funds.
Risk premia on a range of assets had been unusually compressed for some years. If these returned
towards previous levels, that could pose a downside risk to many asset prices, which could have
implications for consumption and investment.
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mpc: <h4>The international economy </h4>
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mpc: 6
The world economy had continued to develop broadly in line with the Committee's central
projections in the May <i>Inflation Report</i>. In the euro area, the Purchasing Managers Indices for June
were slightly stronger for both services and manufacturing. Retail sales had fallen by 0.5% in May,
but unemployment had fallen further and an improving labour market was likely to support future
consumption growth. Monthly indicators had suggested that Q2 GDP growth would be at least as
strong as the Committee's May projection.
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mpc: 7
In the United States, Q1 GDP growth had been 0.2%. The indicators for the second quarter had
been mixed, although GDP growth was still likely to be broadly consistent with the May<i> Inflation </i>
<i>Report</i>. Consumption had risen just 0.1% in May and the latest monthly data for orders and shipments
of non-defence capital goods (excluding aircraft) had fallen following two strong months. Overall,
Q2 business investment was likely to show firm growth. The Institute of Supply Management
manufacturing index had picked up in June, and manufacturing appeared to have recovered from a
period of slower growth at the turn of the year.
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mpc: 8
In Asia, Japanese Q1 GDP growth had been revised up to 0.8% and Chinese indicators also
pointed to further strong growth. Growth had also been robust in the Middle East and in other
oil-producing countries.
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mpc: 9
Euro-area inflation remained steady at 1.9% and, although headline US CPI inflation had edged
up to 2.7%, the Federal Reserve's preferred core inflation measure, based on the personal consumption
expenditures deflator, had fallen to 1.9%. Spot oil prices had risen by around 4% on the month.
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mpc: 10 Given robust external demand in recent years, the Committee discussed why export growth had
not been stronger. One possibility was that it reflected the changing composition of world trade.
Global growth could have boosted intra-Asian trade, for example. And growth in the euro area had
been unusually investment intensive with the United Kingdom not being a significant exporter of
capital goods. However, the United Kingdom should have benefited from growth in demand for
associated financial services. Another consideration was the appreciation of sterling, which had
accompanied the strong global growth. This should have dampened demand for UK exports, though
neither business surveys nor the Agents' reports had indicated that manufacturing firms saw the level
of the exchange rate as a major constraint on export orders.
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mpc: 11 In contrast to the National Accounts, business surveys and the reports of the Bank's regional
Agents suggested rather faster export growth. It was possible that the National Accounts data had
underestimated export growth, either because of the uncertainty associated with fraudulent activity or
because the United Kingdom was a major exporter of services, the values and volumes of which were
naturally much harder to measure accurately.
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mpc: <h4>Money, credit, demand and output </h4>
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mpc: 12 The Quarterly National Accounts had contained fewer and smaller substantive revisions than
normal at this time of year, as the full reconciliation and updating exercise had been postponed for a
year, given other priorities at the Office for National Statistics. There had been some upward revisions
to the level of GDP, although Q1 growth was unchanged at 0.7%. The four-quarter growth rate for
GDP had been revised up a little to 3.0% and for private sector output to 3.7%. The composition of
growth had been little changed.
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mpc: 13 Investment growth in the first quarter had been revised up and consumption growth had been
revised down a little. With household real post-tax income falling sharply, the estimated saving ratio
had fallen to 2.1%, its lowest level since 1960. The decline in income mostly reflected a fall in
employers' special contributions into pension funds so the impact on consumption was likely to be
limited.
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mpc: 14 The latest indicators for the second quarter suggested that total output growth was likely to be
robust. In the CIPS/NTC services survey for June, the activity index had been slightly higher; the new
orders balance had also risen and the 12-month-ahead business expectations index had bounced back
after having fallen in May. The May Index of Production had been provided to the Committee ahead
of publication. Industrial production had grown by 0.6% and manufacturing by 0.4%. The CIPS/NTC
measure of manufacturing output had been slightly lower in June and the new orders balance had
fallen back, although both indices had continued to indicate reasonable growth. The June CBI
<i>Monthly Trends</i> balances for new orders and expected output had both risen.
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mpc: 15 Consumption growth in the second quarter was likely to be strong, although in large part this
reflected weak data in the earlier part of the year. There were some preliminary indications that
consumption might be softening. Retail sales had risen by 0.4% in May but the CBI <i>Distributive </i>
<i>Trades Survey</i> had suggested that sales had fallen back in June. The Bank's regional Agents had also
recorded a slight weakening in the growth of both retail sales and consumer services. But both of
these indicators continued to point to firm growth. The latest information provided to the Bank by
lenders had suggested that the demand for unsecured lending by the household sector had been little
changed in the second quarter, although the supply of credit had tightened. Only about one third of the
one percentage point increase in Bank Rate appeared to have passed through, as measured by the
effective mortgage rate. So there was likely to be an increase in interest payments by households over
the next few quarters as fixed rate mortgages were re-set.
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mpc: 16 In the housing market, the average of the lenders' price indices had risen by 2% in the second
quarter and the Royal Institution of Chartered Surveyors survey preview had suggested less upwards
pressure on prices and fewer new buyer enquiries. There had been some increase in mortgage
approvals in May, although this might have been a temporary boost related to the anticipated
introduction of Home Information Packs. The picture varied by region, but taking the indicators
together, it appeared that there had been a modest softening in both the volume of transactions and
house price increases over recent months.
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mpc: 17 Money growth continued to be robust. Information supplied by the lending institutions before
the recent credit market moves had suggested continuing strong demand for loans by the corporate
sector. In part, this had been driven by mergers and acquisition activity and by commercial real estate
companies. In contrast to households, credit conditions for corporates especially for large companies
and for non-bank financial institutions had appeared to ease, with lower fees, narrower spreads,
larger credit lines and lighter covenants. These credit conditions were likely to have been supportive
of robust investment growth and the associated growth of the financial services sector.
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mpc: <h4>Supply, costs and prices </h4>
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mpc: 18 Earnings growth excluding bonuses was unchanged at 3.6% in the three months to April.
Employment had fallen slightly in the three months to April, compared with the previous three months,
with annual growth at its lowest since 1994. Some of this probably reflected a fall in public sector
employment. Inactivity had also risen further in the three months to April. There continued to be a
puzzle in the contrast between strong output growth and relatively weak employment with rising
inactivity. Committee members discussed a number of potential explanations.
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mpc: 19 One possible explanation was that there had been a structural increase either temporary or
more persistent in the level of unemployment. Although earnings growth had been subdued, it might
not have been weak enough to generate continued growth in employment, given a slower warranted
growth rate in the real consumption wage. A number of factors could have reduced growth in the
warranted real consumption wage: the relative increase in energy prices; rising non-wage labour
costs; and higher effective tax rates. There could have been resistance by employees to the required
downward adjustment to the real consumption wage, possibly reinforced by the effect of the National
Minimum Wage or the impact of the benefits system. There were some anecdotal reports of increasing
mismatch between the skills demanded by firms and those of the available workforce. Such mismatch
could also affect the equilibrium level of unemployment.
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mpc: 20 A second possible explanation was that actual employment was higher than being recorded.
Anecdotal evidence from businesses suggested that migrants' willingness to undertake unskilled,
low-paid jobs meant there had been disproportionate employment growth for migrant workers. It was
possible that the labour market statistics were less likely to capture fully such migrants, in which case
the true growth in employment would be understated.
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mpc: 21 A third possibility was that output growth was insufficient to induce firms to increase
employment. It could be that there was more slack in the economy than output indicators had
suggested, either because the demand data were misleading or because potential output was higher
than appreciated. If this explanation were correct, weak employment growth would not have reflected
any inflexibility in real or nominal wages, nor any significant displacement by migrant workers. Some
of those who had been looking for work would have been discouraged by the pay rates offered and the
lack of jobs, and would now be recorded as inactive. This explanation would also be consistent with
the growth of part-time working and the fall in the number of employees in full-time employment over
the past year.
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mpc: 22 Price indicators had given mixed signals on the month. Manufacturing input prices had risen
sharply in May, driven by crude oil prices. The CIPS/NTC survey input price balances for June had
risen further in both services and manufacturing. Manufacturing output price inflation had fallen in
May, the CIPS/NTC output price balance for June was broadly unchanged and the expected price
balance in the CBI <i>Monthly Trends</i> survey had reversed its rise in May. Both survey balances
remained well above their ten-year averages. The Bank's regional Agents had reported that firms were
looking to restore margins to their levels before the recent energy price shocks. In the services sector,
the CIPS/NTC output price balance rose slightly, but remained only a little above its average over the
past decade.
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mpc: 23 CPI inflation had fallen to 2.5% in May, broadly as projected in the May <i>Inflation Report</i>.
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mpc: <h4>The immediate policy decision </h4>
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mpc: 24 The Committee's central projection in the May<i> Inflation Report</i> had been for CPI inflation to fall
back to below the 2.0% target over the next year, before edging up to settle around 2.0% over the
remainder of the forecast period. That projection had been conditioned on an interest rate path implied
by financial markets which assumed one further 25 basis point rise in Bank Rate, to 5.75%, during
2007. The balance of risks to the outlook for inflation in the medium term had been judged to be on
the upside. The main risks had been identified as: the impact of stronger demand growth on
companies' prices; the evolution of inflation expectations; prospects for energy and import prices;
and the degree of spare capacity in the economy.
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mpc: 25 Since May, the international environment had continued to be robust. Downside risks to the
outlook for the United States had not crystallised and this may have been why dollar market interest
rates had gone up.
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mpc: 26 UK output growth continued to be strong. The level of output had been revised up in the latest
Quarterly National Accounts and reports on business activity from surveys of the Bank's regional
Agents remained robust. Indicators of capacity utilisation in business surveys were above normal.
There had been some monthly indicators suggesting a softening in the housing market and some
preliminary indications that consumer spending was expected to slow, although this was not yet
confirmed by the data. Despite the slowing in unsecured borrowing growth, total personal credit
continued to grow strongly and hence the stock of household debt was increasing.
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mpc: 27 Committee members had differing views about possible explanations for the weakness of the
labour market data relative to the strong output data. For most members the most likely explanations
were either an under-recording of employment or a structural increase in unemployment. For one
member, the weakness in employment had little or nothing to do with structural factors, but reflected
weakness in aggregate demand.
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mpc: 28 Since the May <i>Inflation Report</i>, the CPI inflation data had fallen back broadly as projected.
Energy prices remained volatile, but there was little clear evidence of producer prices either
accelerating or slowing. Although some survey indicators of pricing pressures were elevated, there
had been no significant change in inflation expectations this month.
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mpc: 29 For some members, a change in Bank Rate was not warranted this month, although there were
differing views about the likelihood of Bank Rate needing to be increased further at some juncture.
The labour market data had continued to surprise on the downside, with weak employment growth and
subdued earnings growth. And indicators of capacity utilisation, although somewhat above normal,
were not unusually elevated. So it was not clear that the economy as a whole was operating
substantially above its non-inflationary capacity. Demand growth appeared to be strong but might
have been offset by stronger supply growth, for example reflecting higher migration. Bank Rate had
been increased four times since August 2006, most recently in May 2007, and the exchange rate had
appreciated. The full effects of this significant tightening had yet to be felt. For example, most of the
consequent rise in mortgage rates had yet to be passed through to households. When that happened, it
was possible that demand would start to slow, possibly quite sharply.
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mpc: 30 For these members, the major uncertainties about the impact of higher interest rates, especially
given the high level of the stock of household debt pointed to a gradual approach to any further
tightening in policy. The process of producing the August <i>Inflation Report</i> would provide a better
platform for assessing the current stance of policy and the medium-term outlook for growth and
inflation, and the associated risks.
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mpc: 31 For a majority of members there was a strong case for an immediate rise in Bank Rate of 25
basis points. There was a range of views about the weights to place on different factors. It was most
likely that the weak labour market data reflected a structural increase, possibly temporary, in
unemployment rather than a cyclical weakness in demand. The pressure on capacity utilisation within
firms seemed clear from survey evidence and was confirmed by the anecdotal evidence from
businesses in the regions. Corporate activity generally seemed to be buoyant, with strong growth in
associated business and financial services. Money and credit growth had remained strong. Although
there remained a risk of a slowdown in the housing market and in consumer spending, the data
available for the second quarter had not suggested that this would be any greater than anticipated at the
time of the May <i>Inflation Report</i>. There was also a growing risk from import price pressures, against
the background of a strong global economy. If goods prices inflation continued at its current rate, then
domestic services inflation would need to be lower than it had been in recent years, to be consistent
with the inflation target. In this context, monetary policy was probably only just on the restrictive side.
The shift in market rates had tightened monetary conditions further, but the change in Bank Rate over
the previous year had largely been a withdrawal of an accommodative policy stance and it was not so
surprising that demand growth had not yet slowed in response. It was not clear that data over the
coming months would make the analysis any easier, in part because weather effects would make
seasonal adjustment more difficult than normal. However, the August<i> Inflation Report </i>would be a key
mechanism for re-assessing the medium-term outlook and communicating the Committee's view of the
risks.
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mpc: 32 For some of these members there were downside risks which suggested caution, but these had
not intensified over the month. The May<i> Inflation Report</i> had been consistent with a further rise in
Bank Rate in 2007, with the balance of risks having been judged to be to the upside. Against that
background, for these members, the news since the May <i>Report </i>had now been sufficient to shift the
balance in favour of a move this month, without a clear presumption that further increases would be
necessary.
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mpc: 33 For other members, the data suggested that the overall balance of risks was more firmly to the
upside and any delay in raising Bank Rate this month would run the risk that rates would eventually
have to go higher than otherwise would have been necessary, although no immediate judgement was
being made about the future path of rates.
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mpc: 34 The Governor invited the Committee to vote on the proposition that Bank Rate should be
increased by 25 basis points to 5.75%. Six members of the Committee (the Governor, John Gieve,
Kate Barker, Tim Besley, Andrew Sentance and Paul Tucker) voted in favour of the proposition.
Rachel Lomax, Charles Bean and David Blanchflower voted against, preferring to maintain Bank Rate
at 5.5%.
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mpc: 35 The following members of the Committee were present:
Mervyn King, Governor Rachel Lomax, Deputy Governor responsible for monetary policy John Gieve, Deputy Governor responsible for financial stability Kate Barker Charles Bean Tim Besley David Blanchflower Andrew Sentance Paul Tucker Dave Ramsden was present as the Treasury representative.
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mpc: <h4>MINUTES OF THE MONETARY POLICY COMMITTEE MEETING HELD ON 1-2 AUGUST 2007</h4> 1
Before turning to its immediate policy decision, and against the background of its latest
projections for output and inflation, the Committee discussed financial markets developments; the
international economy; money, credit, demand and output; and costs and prices.
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mpc: <h4>Financial markets </h4>
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mpc: 2
At its previous meeting, the Committee had noted, in the light of concerns about the US sub-
prime mortgage market, that risk premia on a range of assets had been unusually compressed for some
years, and, if these returned towards previous levels, there was a risk that many asset prices might fall,
which could have implications for consumption and investment.
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mpc: 3
The main news this month in financial markets had been the sharp deterioration in credit markets
and the associated falls in equity prices and changes in market interest rates. A trigger for this
turbulence appeared to be renewed concerns about the US sub-prime mortgage market, the losses of
some prominent hedge funds, and the revisions to the ratings of some mortgage-backed securities; this
had led to a reduction in demand for products such as sub-prime mortgage-backed securities and
collateralised debt obligations. The movements in markets for sub-prime securities had spread to
corporate credit yields, although corporate default rates remained very low, and particularly to the
leveraged loan markets and collateralised loan obligations. Contributing to that had been nervousness
about the robustness of rating agency assessments of securitised products more generally. There had
been a far less pronounced widening of spreads on lower-rated mortgage-backed securities in the
United Kingdom. Conditions in the leveraged loan and wider corporate credit markets were described
by market contacts as illiquid, and investment banks would have to hold the large number of deals in
the pipeline for longer. It might take a while for all the effects to work through as further downgrades
were made and losses were recognised on instruments that were not frequently traded.
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mpc: 4
The Committee also noted that yields on risk-free assets had declined somewhat. So the rise in
yields on some riskier assets had not been quite as much as the rise in spreads. But not all of the
adjustment might be taking place in yields. It was possible that the quantity of credit from banks and
capital markets might also be reduced by more than the fall induced by the observed change in
market yields alone.
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mpc: 5
It was not clear how far the downturn in financial markets would go, nor how long it would
persist. To date, the movements amounted to a sharp correction of the unusual compression of credit
spreads, which had been a source of concern for some time. If it stopped at that, the macroeconomic
effects of events could be limited, and were likely to be more pronounced in the United States than
elsewhere. If the movements gathered momentum, however, there could be a more marked effect on
the wider economy.
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mpc: 6
Equity prices had fallen sharply towards the end of the month, with the FTSE All-Share, Euro
Stoxx and S&P 500 all declining by around 4-6%. The falls in equity prices had been broadly based.
In the case of the FTSE, the late-July falls had unwound all of the gains recorded since the beginning
of the year. Given that risk-free interest rates had fallen, that suggested that the decline in equity
prices might be ascribed to either heightened perceptions of risk, a removal of the takeover premium or
downward revisions to expected earnings. However, there was, as yet, little evidence of a fall in
expected earnings.
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mpc: 7
Short-term market interest rates had fallen by around 15-35 basis points in the United Kingdom,
the United States and the euro area. A further rise in Bank Rate was no longer fully priced into the
market by the end of the year, and, although 60% of City economists responding to a Reuters poll
expected a further rise in Bank Rate by the end of the year, none thought it would occur this month.
There had been steeper falls further along the yield curve, mostly accounted for by falls in real interest
rates. Despite the recent falls, forward interest rates some twelve to eighteen months ahead had
remained around 20-30 basis points higher than at the time of the May <i>Inflation Report</i>.
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mpc: 8
The sterling effective exchange rate index had appreciated a little over the first part of the month,
but had fallen back by the time of the meeting. The dollar had depreciated over the month as a whole.
<h4>The international economy </h4>
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mpc: 9
Aside from the developments in financial markets, there had been relatively little news on the
international economy since the previous meeting. In the euro area, estimated GDP growth in Q1 had
been revised up slightly to 0.7%, reflecting upward revisions to consumption and net trade, partly
offset by downward revisions to investment and stockbuilding. The broad pattern of the expenditure
breakdown of GDP growth had remained unchanged.
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mpc: 10 Beyond the first quarter, the Purchasing Managers' Indices (PMIs) pointed to growth in the
second quarter in the euro area at a similar rate to the first, although the monthly industrial production
and expenditure indicators implied a rather weaker figure. There were declines in both the
manufacturing PMI and the flash estimate for the service sector in July. As yet, there had been little
sign of the diminishing margin of spare capacity pushing up on inflation, with euro-area HICP
inflation edging down to 1.8% in July.
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mpc: 11 In the United States, there had been substantial downward revisions to the estimated level of
GDP for the previous three years. But Q2 GDP growth of 0.8% had been broadly as expected. Non-
residential investment had strengthened, and the previous quarter's weakness in net trade had
unwound. Consumption growth had been subdued, but that might reflect the squeeze on real incomes
from the rise in petrol prices, following a temporary shortage of refining capacity. However, some
commentators had become more pessimistic, particularly about the housing market, where the unsold
stock of new dwellings had risen substantially in recent months. Annual CPI inflation had been
unchanged in June, but the Federal Reserve's preferred core inflation measure based on the personal
consumption expenditures deflator had fallen slightly.
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mpc: 12 Turning to Asia, four-quarter GDP growth in China had been estimated to have increased to
almost 12% in the second quarter. The monthly indicators in Japan, however, had continued to point
to some slackening in growth in the second quarter. Elsewhere, activity had seemed to be generally
strong in the Middle East and Africa.
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mpc: 13 Spot oil prices had risen on the month by around 2-3% in sterling terms. But futures prices had
been little changed, suggesting that the rise in spot prices was expected to be temporary. The bigger
question was whether the underlying upward trend in oil and other commodity prices was set to
continue, or reverse. That rise in oil and other commodity prices probably reflected the rapid growth
of the global economy pushing up on commodity demand in the face of short-term inelastic supply.
The rise in prices should eventually induce an expansion of supply capacity. However, the latest
projections for the oil market from the International Energy Agency suggested that, if anything, the
gap between available supply and demand would fall further over the next few years.
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mpc: <h4>Money, credit, demand and output </h4>
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mpc: 14 The Committee then turned to domestic demand, and the question of whether any deceleration
was visible in response to the previous increases in Bank Rate. Retail sales had risen by 1.1% in Q2,
but that had partly reflected the weakness of spending in the first quarter. The average monthly growth
rate over the past three months had been below 0.2%, suggesting that some slowing in household
spending growth might be taking place. However, the monthly data were volatile and the correlation
of retail sales with overall consumption was not strong. Early, and uncertain, estimates of the growth
of distribution, hotels and catering output suggested a slowing in Q2; this might provide some
corroborative evidence, as a similar development had signalled the slowdown in consumption growth
in 2004-05. Further evidence of some softening in consumption growth in recent months had come
from the CBI <i>Distributive Trades Survey</i> and reports from the Bank's regional Agents.
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mpc: 15 The evidence from the housing market still seemed to be consistent with a gentle slowing. The
Nationwide house price index had risen by just 0.1% in July, while the Halifax index had risen by
0.7%. A preview of the Royal Institution of Chartered Surveyors survey had shown a fall in the price
balances in July. Mortgage approvals had held up in June, but might have been influenced by the
introduction of Home Information Packs. More forward-looking indicators, such as the Home
Builders Federation site visitors and net reservations balances, continued to point to further slowing.
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mpc: 16 The latest investment indicators had remained strong. Although the British Chambers of
Commerce (BCC) measure of investment intentions for the service sector had edged down in the
second quarter, they had risen sharply for the manufacturing sector. The CBI <i>Industrial Trends Survey</i>
had also shown an increase in investment intentions. By contrast, commercial property yields were
currently below the cost of funds and there seemed to be a considerable amount of office building in
the pipeline. The latest CBI and BCC surveys suggested that export orders had remained relatively
strong.
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mpc: 17 Aside from the financial market risks to activity, there was little news in the latest monthly data
on money and credit. The M4 growth rate had slowed to 12.9% in the year to June, while M4 lending
(excluding securitisations) had risen by 13.5% over the same period.
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mpc: 18 Turning to output, the provisional estimate of Q2 GDP growth had been a little weaker than
expected last month, at 0.8%. This was the sixth consecutive quarter in the 0.7-0.8% range. The four-
quarter growth rate was 3.0%. Market sector output growth had been rising more strongly than GDP
growth.
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mpc: 19 Some of the pickup in recorded GDP growth between the first and second quarters had reflected
temporary factors affecting manufacturing output. Aircraft production had boosted manufacturing
output in 2006, but dipped sharply in the first quarter, while recorded shipbuilding output had pushed
up in the second quarter. Those temporary factors should abate in the third quarter, which would
therefore reduce manufacturing output growth. The manufacturing CIPS/NTC activity index edged up
in July, while the new orders index rose more strongly. But there had been a decline in the activity
balances of the CBI <i>Industrial Trends Survey</i>. For services, the CIPS/NTC activity and new orders
indices both fell, and the activity index, although well above its neutral level of 50, had been at its
lowest since the previous autumn.
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mpc: 20 The recent floods would have depressed agricultural output and curtailed output of some other
lines of business, such as tourism and leisure services. There could also have been indirect effects as a
result, for example, of travel disruption. Similarly, there could have been depressing effects on
consumers' expenditure, although that might simply be offset by involuntary stockbuilding by
retailers. Moreover, consumers might make up for any reduction in spending later in the year, or by
spending more elsewhere. In addition, output and expenditure should eventually be boosted by
reconstruction activity and the replacement of damaged property.
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mpc: <h4>Costs and prices </h4>
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mpc: 21 The Labour Force Survey measure of employment had risen by 93,000 in the three months to
May compared with the previous three months, reversing the downward trend observed over the
previous few months. Unemployment had fallen by 35,000, and had been sufficient to edge the
unemployment rate down to 5.4%.
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mpc: 22 Pay settlements in the twelve months to June had averaged 3.2%. Annual pay growth, according
to the Average Earnings Index (AEI), had fallen back in the three months to May, both including and
excluding bonuses. Annual pay growth on the experimental Average Weekly Earnings (AWE)
measure remained around a percentage point higher than the AEI growth rate. According to a
reconciliation table published by the Office for National Statistics (ONS), a significant part of the
difference in early 2007 had been accounted for by the different treatment of outlying observations,
although other factors had been important in earlier periods. It remained difficult to know which
earnings measure to put most weight on. The ONS were continuing to do further work to extend the
analysis, by adding to the detail and assessing the sensitivity of the results.
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mpc: 23 Manufacturing input price inflation had picked up slightly to 2.1% in June, partly reflecting
higher oil prices. The CIPS/NTC survey had suggested that manufacturing input price pressures
intensified in July. However, the CIPS/NTC input price index for services had declined a little.
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mpc: 24 The fraction of firms working at full capacity had risen in the CBI <i>Industrial Trends Survey</i>, and
more firms had reported that capacity was a constraint on output. By contrast, capacity utilisation
balances had declined for both manufacturing and service sector companies in the BCC survey. The
picture from the manufacturing surveys on output prices was mixed this month, while the CIPS/NTC
services output price index had fallen.
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mpc: 25 CPI inflation had fallen to 2.4% in June. The near-term outlook remained somewhat uncertain,
particularly given the recent volatility in food, household goods and utility prices. For example, the
recent poor weather and flooding might lead to upward pressure on wholesale food prices. But the size
and timing of any effect at the retail level was difficult to gauge, especially given the decline in food
inflation in recent months.
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mpc: <h4>The August GDP growth and inflation projections</h4>
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mpc: 26 The Committee reached its policy decision in the light of the projections to be published in the
<i>Inflation Report</i> on Wednesday 8 August.
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mpc: 27 Conditional on market participants' expected path of interest rates, and using current ONS
estimates of recent GDP growth, the Committee's central projection was for UK output growth to
moderate to around its long-term average, as consumer spending and business investment decelerated
in the near term and public spending growth eased further ahead. The GDP profile in the August
<i>Report</i> was somewhat weaker than in May, reflecting the rise in interest rates and the exchange rate.
Judging by the past pattern of revisions and indicators from business surveys, the Committee
considered it likely that recorded output growth in recent quarters would eventually be revised up.
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mpc: 28 The Committee's central projection was for inflation to fall back during the second half of this
year, and to settle around the 2% target. Compared with the corresponding projection in the May
<i>Report</i>, the profile was a little higher in the near term, reflecting higher oil prices and a slightly smaller
margin of spare capacity in the economy. Further out, it was marginally lower, reflecting the weaker
projections for output growth.
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mpc: 29 There were substantial uncertainties surrounding these projections. These included, in particular:
the prospective impact on domestic demand of past increases in Bank Rate and recent developments in
credit markets; the degree of spare capacity in businesses and the labour market; the likely duration of
the global expansion, and its implications for world prices; and the evolution of inflation expectations.
There remained a greater-than-usual uncertainty about the outlook for inflation, as in May. Overall,
the risks to growth were judged to be balanced. The risks to inflation were weighted slightly to the
upside in the medium term. There was a range of views on the Committee about both the central
projection and the balance of risks.
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mpc: <h4>The immediate policy decision </h4>
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mpc: 30 There was little, if any, expectation in the markets of a change in Bank Rate this month. The
main news had been the substantial volatility in financial and credit markets in recent days. It was too
early to know whether these movements would be sustained or go further. The changes in equity
prices, yield curves and exchange rates had been factored into the latest <i>Inflation Report</i> projections.
But it was unclear whether, beyond these narrow asset price effects, there would be more substantial
real effects on the economy in the United States, or on the rest of the world. Moreover, it might take
time to see the full extent of these shocks, and for financial market prices to reach new equilibria. At
present, members largely viewed the credit market developments as posing a risk to their projections
for output and inflation, rather than a factor directly influencing their central view. The Committee
would want to monitor closely data on both the price and quantity of credit over the coming period in
order to assess this risk.
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mpc: 31 The world economy had continued to grow briskly. The central assumption was for somewhat
slower UK-weighted world growth in future years, but there were risks in both directions. It remained
particularly difficult to weigh the risks around euro-area consumption growth, and around residential
investment in the United States. The recent strength of the global economy had underpinned the
continuing rises in oil and commodity prices, which were feeding through to the UK's terms of trade
and could pose an upside risk to inflation.
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mpc: 32 Turning to domestic demand, it was still too early to be confident whether the signs of softening
in some UK consumption indicators were a reaction to the past increases in Bank Rate, or simply
reflected volatility including unusual weather with underlying household spending being resilient.
Different members placed different weights on the evidence from the ONS data, the surveys and the
reports from the Bank's regional Agents. The housing market showed signs of softening this month.
Although business investment had fallen in the first quarter, the surveys suggested that intentions
remained robust in the near term. But, further ahead, investment might also be expected to respond to
the past rises in Bank Rate and recent credit market turbulence.
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mpc: 33 The latest Q2 GDP data had been slightly weaker than anticipated. Although there was a range
of views, the Committee thought that, on balance, estimated output growth was likely to be revised up.
The key issue was by how much growth would slow, given past increases in Bank Rate, and when and
whether that would be sufficient to keep inflation close to the target, since it was not only the size of
the gap between potential supply and demand that mattered, but how that translated into pressure on
inflation.
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mpc: 34 Employment had strengthened in the latest data, and so had lessened somewhat the previous
puzzle of weak employment in the face of robust output growth. There was a range of views about the
margin of spare capacity in the labour market. Survey measures of capacity utilisation within
businesses remained elevated. While some of the output price surveys had eased over the past month,
a number remained above their historical average. Some members thought that these factors remained
an upside risk to inflation.
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mpc: 35 CPI inflation had continued to return towards the target in June, reducing the probability that
inflation expectations would become dislodged. But the near-term outlook was still clouded with
uncertainty, particularly about the path of household goods, food and utility prices. Given the
experience of rising inflation last winter, and the fact that other measures of inflation such as RPI
and RPIX remained high, there was a risk that inflation expectations would be particularly sensitive
to further adverse cost shocks. Although there were still more effects to come from the recent rise in
oil prices, some of the earlier rises in energy prices had now largely fed through to retail prices. So it
was possible that there would be a somewhat clearer view of the relationship between the gap between
demand and potential supply and the outlook for inflation than there had been in the recent past.
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mpc: 36 Given all of the above factors, and in the light of the projections for output and inflation,
Committee members favoured leaving Bank Rate unchanged. There was a range of views about the
risks to inflation and growth. The future path of Bank Rate would depend on the evidence in the
months ahead about whether and how the risks were crystallising; most members emphasised that
they had no firm view on whether rates would need to rise further.
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mpc: 37 The Governor invited the Committee to vote on the proposition that Bank Rate should be
maintained at 5.75%. The Committee voted unanimously in favour of the proposition.
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mpc: 38 The following members of the Committee were present: Mervyn King, Governor Rachel Lomax, Deputy Governor responsible for monetary policy John Gieve, Deputy Governor responsible for financial stability Kate Barker Charles Bean Tim Besley David Blanchflower Andrew Sentance Paul Tucker Nicholas Macpherson was present as the Treasury representative.
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mpc: </BODY>
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mpc: <h4>MINUTES OF THE MONETARY POLICY COMMITTEE MEETING HELD ON 5-6 SEPTEMBER 2007</h4> 1
Before turning to its immediate policy decision, the Committee discussed financial markets
developments and credit; the international economy; demand and output; and supply, costs and
prices.
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mpc: <h4>Financial markets and credit </h4>
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mpc: 2
There had been considerable disruption in financial markets during August. The original cause
of the concerns had been a continuing deterioration in the US housing market and increasing default
rates on sub-prime mortgages. Securities backed by such mortgages had seen a significant fall in price
and hence widening of spreads during July, and this trend had continued into August. As investors had
re-considered the risks associated with sub-prime mortgages, there appeared to have been a widespread
re-pricing of all asset-backed securities (ABS), including mortgage-backed securities of higher credit
standing, mortgage-backed securities in other countries including the United Kingdom, and ABS
backed by other assets or receivables such as credit card payments. In turn, this had affected
structured credit products backed by portfolios of ABS. These wider market developments seemed to
be caused in part by a loss of investor confidence in the ratings given to such securities by the ratings
agencies and also by difficulties in assessing the level and final ownership of the risks underlying
structured credit products.
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mpc: 3
As spreads for ABS had widened, and large losses by a few individual firms were reported,
investors also became reluctant to invest in asset-backed commercial paper (ABCP): short-term
instruments which had been issued to fund various off-balance-sheet conduits and structured
investment vehicles which held, among other assets, portfolios of ABS and structured credit products.
As demand for ABCP had dissipated, many of these conduits looked likely to need to draw on
committed liquidity lines from the banks. As a result, many banks were faced with a sudden and
unexpected prospect of either providing that committed liquidity or bringing the assets backing the
paper on to their own balance sheets. This was happening at a time when, as discussed at the August
MPC meeting, some banks had already had to accommodate a higher-than-normal stock of leveraged
corporate loans, for which the market had previously become illiquid. The need to provide funding for
potentially large portfolios of loans, ABS and related products had led banks to demand extra liquidity
via other short-term money market instruments. The extra demand for short-term liquidity, and
uncertainties about who had large exposures to US sub-prime mortgages, meant that banks had, as a
general matter, become reluctant to lend to each other at maturities beyond a few days in most
currencies, including sterling.
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mpc: 4
Short-term market interest rates had risen internationally, despite expectations of policy rates
implied by overnight index swap markets having fallen. This reduction in expectations had been
confirmed by discussions with market contacts. For a short period in mid-August, the overnight rate
for secured sterling borrowing, which was normally just a few basis points above Bank Rate, had risen
significantly, although it had since fallen back towards Bank Rate. Market interest rates from
overnight out to several months had become elevated internationally, with unsecured rates having
generally risen by more than secured. Sterling three-month LIBOR had risen by around 75 basis
points on the month, for example. In contrast, medium-term forward interest rates had fallen, with
implied sterling rates three years ahead lower by around 20 basis points. Bond markets had seen a
shift in preference towards low-risk assets, with the yield on US Treasury Bills falling briefly below
2% in mid-August.
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mpc: 5
Other financial markets had been affected less. Equity prices had fallen in mid-August but had
since recovered. In the foreign exchange market, the main development had been a sharp appreciation
in the yen, as there had been some unwinding of speculative currency positions funded by borrowing
in yen. The sterling effective exchange rate index had fallen by 0.4% on the month.
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mpc: 6
It was not clear how long these disrupted conditions would persist. The deterioration in the US
housing market, and the attendant rise in defaults and foreclosures, might carry on for some time.
Committee members noted that eventually market participants should be able to re-evaluate the risks
involved, re-price the relevant securities and probably re-assess the price of credit more generally,
discriminating better between different assets. The adjustment process should be temporary but overly
compressed credit risk premia in markets had been an issue for some time, as discussed in past issues
of the Bank's <i>Financial Stability Review </i>and<i> Report</i>, and a sustained re-pricing of credit risk would
not, in itself, be unwelcome. It was likely that a degree of de-leveraging by some market participants
would take place, which could affect a wider set of financial markets while the transition was made.
The faster all these changes happened, the sooner market activity would start to normalise, and it was
possible that this might happen quite quickly. Once these processes were complete, the demand for
additional liquidity, and the associated rise in LIBOR spreads, should fall back. But September was a
month when a large proportion of ABCP was expected to mature in a short time interval so, in advance
of that, money market liquidity could become increasingly concentrated at overnight and very short-
term maturities, unless ABCP conduits were able to re-issue paper, or banks could put alternative
funding in place. And some of the structured investment vehicles had less access to committed
liquidity lines (although they would also have a higher proportion of medium-term funding). Quarter-
end results for many financial firms would reveal the extent of any losses through this period, although
the valuation of some instruments was difficult where there was little trading taking place. So the
adjustment path might well not be smooth.
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mpc: 7
There was little evidence as yet that banks had changed their assessment of corporate or
consumer credit beyond the US sub-prime mortgage sector. Investment-grade bond yields had been
broadly unchanged although, as government bond yields had fallen, investment-grade spreads had
widened. Going forward, the impact on consumer and corporate credit would depend on factors such
as whether there was a sustained re-pricing of credit risk; whether banks constrained use of their funds
because of a heightened perception of liquidity contingencies; whether the elevated levels of
short-term money market rates would cause lending rates to the corporate and retail sectors to rise
significantly or would ease back once balance-sheet adjustment took place; and the impact of falls in
the price of collateral. Existing floating-rate loans linked to LIBOR would have seen rates rise quite
sharply already, but more generally it was too early to tell how significant the consequences might be
for the price and quantity of credit.
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mpc: <h4>The international economy </h4>
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mpc: 8
In the US economy there was further evidence of housing market weakness: a falling level of
existing home sales, subdued house prices and a further tightening in lending standards to the
sub-prime sector recorded in the Senior Loan Officer Survey. This contrasted with the resilience of
the economy more generally: Q2 GDP growth had been revised up to 1% from 0.8%, with downwards
revisions to residential investment more than offset by upwards revisions to consumption and
non-residential investment. Survey data for the third quarter had been consistent with somewhat
slower US growth, as expected at the time of the August <i>Inflation Report.</i> Headline US inflation had
fallen in July, reflecting lower energy prices, though core inflation measures had been unchanged and
unit labour costs had accelerated. Following the financial market disturbances, the markets were now
expecting cuts in US interest rates of at least 50 basis points before the end of 2007.
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mpc: 9
In the euro area, second-quarter GDP growth had been 0.3%, reflecting weaker-than-expected
consumption growth and stockbuilding. Weak output growth might have reflected erratic effects from
the number of working days and the weather. Surveys continued to be consistent with firm Q3 growth,
although some contemporaneous and forward-looking balances had eased in August. The first
estimate of HICP inflation for August had been 1.8%. Following the financial market disturbances,
the markets were no longer expecting increases in the ECB's official interest rates in the near future.
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mpc: 10 In Asia, Japanese Q2 GDP growth had been subdued at 0.1% and monthly indicators for the
third quarter had not been very strong. Importantly, other Asian economies, such as China and India,
and other emerging market economies, continued to make a strong contribution to world activity.
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mpc: 11 Oil prices had been volatile on the month, initially falling by some 12%, perhaps reflecting some
spill-over from other financial markets as speculative positions were reduced, but the price had since
recovered to be around 3% lower than at the time of the August <i>Inflation Report.</i> In other commodity
markets, the <i>Economist</i> dollar metals index had fallen by over 6% but food prices had risen strongly,
with wheat prices up over 20%.
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mpc: <h4>Demand and output </h4>
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mpc: 12
The second estimate of Q2 domestic GDP growth had been unrevised at 0.8%. The first
estimate of consumption growth in Q2 was 0.7%, which was weaker than expected. Business
investment growth had been 0.8%.
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mpc: 13 In the third quarter, surveys of manufacturing output continued to suggest strong underlying
growth relative to the previous ten years. The latest ONS data had shown a small fall in manufacturing
output in July. However, the ONS data in Q2 had been influenced by some erratic strength in
shipbuilding in Q2 and so Q3 data might show slower growth than Q2. Reports from the Bank's
regional Agents, had been consistent with some slowing in the annual rate of growth in August. In the
services sector, the data had been mixed, although the survey balances continued to suggest somewhat
firmer growth than the official data. The CIPS/NTC business activity balance had edged up in August,
but the new orders balance had eased back a little. The Bank's regional Agents had suggested some
slowing in business services growth for the third quarter, and both the Agents and the CBI/Grant
Thornton survey had also suggested a slowing in consumer services. It was also possible that the
disturbances in financial markets could lead to slower growth in financial sector output, which
accounted for around 8% of GDP on the ONS measure.
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mpc: 14 Consumption indicators for the third quarter were mixed. Retail sales volumes had risen by
0.7% in July, reflecting a sharp fall in the level of the price deflator retail sales values had actually
fallen. Reports from the Agents had suggested a slowing in retail sales and consumer services in
August. The CBI <i>Distributive Trades</i> survey retailers' balance fell, but the British Retail Consortium
survey edged up, narrowing the previous difference between them. The housing market data remained
consistent with a gentle slowdown: the average of the lenders' house price indices, as measured by the
three-months on previous three-months growth rate, had slowed to 1.7% in August and surveys of
housing activity had mostly continued to point to some further gentle slowing ahead.
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mpc: 15 Manufacturing investment had fallen in the second quarter, which was perhaps surprising given
the strength in manufacturing output. Investment intentions had remained strong, with the EEF survey
balance reaching a new series high. One heightened uncertainty arising from financial market
disturbances was the possible impact on the level of business investment in commercial property.
Surveys pointed to continued firm growth of exports in the third quarter.
http://mpc.theyserveforyou.com/meetings/2007/9/5/28
mpc: <h4>Supply, costs and prices </h4>
http://mpc.theyserveforyou.com/meetings/2007/9/5/29
mpc: 16 Employment data had continued to show a recovery from weakness earlier in the year.
Employment had risen by 93,000 in the three months to June and the Labour Force Survey measure of
unemployment had fallen by 45,000, with the unemployment rate easing down to 5.4%. There had
also been further rises in recorded vacancies, although inactivity had risen by 45,000. The Recruitment
and Employment Confederation survey, which had been particularly strong, pointed to a noticeable
weakening of the labour market in August, although this survey had not generally been a reliable
indicator of the official data. The Agents had also reported some weakening in employment intentions.
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mpc: 17 Pay pressures remained muted. Those pay settlements so far recorded for July suggested an
unchanged annual rate of 3.2%. Overall average earnings growth had fallen back to 3.3% in the three
months to June.
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mpc: 18 Manufacturers' input prices had fallen in July, with the twelve-month rate of inflation falling to
zero from 2.1% the previous month. The CIPS/NTC manufacturing survey input prices balance for
August had fallen, although it remained at a high level. The corresponding services balance had also
dropped, to its series average.
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mpc: 19 The evidence on producer output prices was somewhat mixed. The CIPS/NTC manufacturing
survey price balance had fallen, while the CBI <i>Monthly Trends</i> balance had risen. Both remained at
high levels relative to the previous ten years. The CIPS/NTC services output price measure had edged
up slightly, although the CBI <i>Distributive Trades</i> and CBI/Grant Thornton services surveys had both
recorded sharp falls in their consumer price balances.
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mpc: 20 The CPI inflation rate had fallen sharply to 1.9% in July, a slightly bigger fall than that expected
in the August <i>Inflation Report</i>. This was the largest monthly fall in the annual inflation rate in five
years and reflected weaker prices for household goods prices and for food and soft drinks. There had
also been a fall in petrol prices, although the underlying oil price remained volatile. CPI inflation was
still likely to remain around, or a little below, the 2% target for the next few months, but the
Committee noted that it could also be subject to a number of erratic influences from food and energy
prices and from the seasonal pattern of discounting in sales.
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mpc: <h4>The immediate policy decision </h4>
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mpc: 21 As usual, the Committee considered the developments on the month in the context of the most
recent <i>Inflation Report</i>. The central projections from the August <i>Report</i> had been for inflation to
remain close to the 2% target over the forecast period and for output growth to ease, reflecting a
slowing in both consumer spending and business investment. Overall, the risks to growth had been
judged to be balanced. The risks to inflation had been weighted slightly on the upside in the medium
term, although there had been a range of views among the Committee on both the central projection
and the risks.
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mpc: 22 The recent news from the real economy had not materially changed the outlook. The
international economy had continued to grow at a healthy pace, although some of the data including
that for the US housing market, and euro-area Q2 GDP growth had weakened. In the United
Kingdom, GDP growth for the second quarter had been unrevised and indicators for the third quarter
had been consistent with continued robust growth, with some indicators of a possible moderation in
consumption. Consumption growth in the second quarter had been slightly weaker than expected. The
housing market appeared to be gently slowing.
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mpc: 23 In the labour market, employment had been growing more strongly than earlier in the year but
pay growth remained muted. One possible explanation was that migrant workers might be having an
effect on the level of wages, especially for lower-paid jobs. A second was that higher non-wage costs
required further downward adjustment in real wages. There were some contrary survey indicators on
the pace of employment growth but the Committee judged that it would need further evidence before
placing weight on those, rather than on the official data.
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mpc: 24 The margin of spare capacity in the economy appeared limited and indicators of pricing pressure
remained somewhat elevated. CPI inflation had fallen to just below the 2% target and it seemed most
likely to remain around that level over the next few months, although some components were likely to
be erratic. The Committee noted that the fall in CPI inflation to around the target level should help
contain inflation expectations going forward.
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mpc: 25 Since the August MPC meeting, heightened concern in financial markets about a variety of
asset-backed securities had led to disruption around the world, not only in markets for those financial
instruments but also in money markets more generally. The impact of financial market disruption
would depend on how long it persisted and how widespread it turned out to be. This was still very
unclear. Short-term money market rates had remained elevated, but the Bank had announced action
intended to ensure that the secured overnight rate and expectations of that rate were brought back
into line with Bank Rate.
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mpc: 26 Most of the problems had been manifested in the inter-bank markets or between banks and other
financial institutions, rather than linked to any underperformance of the wider economy: only the US
housing market had actually weakened significantly. Losses from mortgage defaults in the United
States remained small relative to the capital of the banking system. The major banks had recently
enjoyed strong profits and it appeared that they were well capitalised, so that even if all of the ABS
funded by ABCP had to be absorbed by banks' balance sheets, they should have sufficient capital
above their regulatory minima to accommodate the impact in the long term. And as non-bank
investors switched away from credit and related markets, the flows into other assets, including bank
deposits, should find their way back on to banks' balance sheets to help provide some of the necessary
funding. Once the process of adjustment in banks' balance sheets had taken place, the demand for
higher liquidity should ease and the elevated LIBOR rates fall back. In the interim, however, there
could be marked transitional effects; for example, if banks sought to restore their previously desired
levels of capital or hold unusual levels of liquidity.
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mpc: 27 The Committee noted that its mandate was to set interest rates so as to meet the Government's
inflation target of 2%, so the issue was the extent to which developments in financial market
intermediation would affect the wider economy and hence the outlook for inflation. Committee
members highlighted a number of channels through which this could occur. One channel was through
market interest rates. To the extent that there was a sustained re-pricing of risk, that could feed
through to retail or corporate lending rates and credit conditions would tighten without any further
change in Bank Rate. A second channel was via the associated impact on asset prices, which would
reduce wealth and affect the value of collateral available to borrowers. A third channel could be
through pressure on banks' balance sheets, as described above. Fourth, a more direct channel could
arise because the financial sector including the wholesale markets was itself an important part of
the UK economy and any fall in activity levels would have a direct impact on UK GDP growth.
Finally, greater uncertainty about the economic outlook might lead to a postponement of business
investment.
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mpc: 28 Taking into account the data on the real economy and financial market developments, the
Committee agreed that the upside balance of risks to inflation in the August <i>Inflation Report </i>
projections had probably receded. The outlook was now more uncertain. As stated in its August
<i>Inflation Report</i>, the MPC was monitoring closely the evolution of both credit spreads and the
quantities of credit extended, alongside all other data relevant to the outlook for inflation.
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mpc: 29 The Governor invited the Committee to vote on the proposition that Bank Rate should be
maintained at 5.75%. The Committee voted unanimously in favour of the proposition.
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mpc: 30 The following members of the Committee were present: Mervyn King, Governor Rachel Lomax, Deputy Governor responsible for monetary policy John Gieve, Deputy Governor responsible for financial stability Kate Barker Charles Bean Tim Besley David Blanchflower Andrew Sentance Paul Tucker Nicholas Macpherson was present as the Treasury representative.
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mpc:
http://mpc.theyserveforyou.com/meetings/2007/10/3/11
mpc: <h4>MINUTES OF THE MONETARY POLICY COMMITTEE MEETING HELD ON 3-4 OCTOBER 2007</h4> 1
Before turning to its immediate policy decision, the Committee discussed financial markets
developments and credit; the international economy; demand and output; and supply, costs and
prices.
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mpc: <h4>Financial markets and credit </h4>
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mpc: 2
Some financial markets remained fragile, and were still not functioning normally. There had
been some improvement in US credit markets, where the recent turmoil had originated. Spreads on US
mortgage-backed securities had stabilised or, for highly rated securities, declined. Investors seemed to
be cautiously returning to the asset-backed commercial paper market: spreads were falling back;
some issuers had found it easier to roll over paper; and maturities were slightly longer. In the United
Kingdom, spreads on mortgage and other asset-backed securities had generally widened further except
for the most highly rated. The volume of transactions remained at low levels. Across all markets,
investors appeared to be beginning to discriminate between different instruments according to their
underlying credit quality. Market conditions had been helped by the release of some more information
about where losses resided, as institutions announced their financial results for the third quarter.
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mpc: 3
There had been some improvement in money market conditions. Very short secured sterling
rates had generally been close to Bank Rate since the beginning of the monthly maintenance period on
6 September, with the Bank acting to stabilise the secured overnight interest rate.
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mpc: 4
Since mid-September, the spread between the three-month sterling inter-bank lending rate
(LIBOR) and the expected policy rate, implied by interest rate swap agreements, had fallen back. The
equivalent US spreads, which had already started to narrow, had fallen back further in the wake of the
Federal Reserve's decision to reduce its target federal funds rate by 50 basis points on 18 September.
Nevertheless, sterling, euro and dollar three-month LIBOR rates were all still high relative to the
corresponding expected policy rates.
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mpc: 5
Expectations of major central banks' policy rates, derived from interest rate swap agreements,
had fallen internationally. At the time of the August <i>Inflation Report</i>, the markets had been pricing in
another rise in Bank Rate by the beginning of next year. But by the time of the October meeting, they
appeared to be pricing in a 25 basis points cut by the end of 2007, although conditions in money
markets meant that these market-based measures were highly uncertain. None of the economists
polled in a Reuters' survey expected a rate change at this meeting, but a clear majority anticipated a
rate cut at some point in the next six months. The decline in expected policy rates at shorter maturities
had been accompanied by a rise in longer-term forward rates since the August <i>Inflation Report</i>.
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mpc: 6
Partly reflecting movements in relative interest rates, the sterling effective exchange rate index
had depreciated by around 2% this month.
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mpc: 7
Despite the turmoil in some financial markets, equity prices continued to rise, with the main US
and European indices up 3%-5% since August. The apparent resilience of equity prices seemed
surprising given the deterioration in the major economies' growth prospects. One possible explanation
was that the continuing strength of the emerging market economies was expected to help maintain
sales and profits of companies in the developed world. That story was consistent with the noticeably
weaker equity prices of smaller companies, which were likely to be more reliant on domestic demand.
Another explanation might be that globalisation had reduced the pro-cyclicality of profits, with wages
and employment now expected to bear more of the burden in downturns. It was also possible that
participants in equity markets believed that central banks would act to maintain output growth.
Corporate bond yields especially for higher quality borrowers had been broadly unchanged since
August.
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mpc: 8
At home, the Bank of England's <i>Credit Conditions Survey</i> suggested that banks expected to raise
both the price and non-price terms of their lending to non-financial companies over the next three
months. Conditions facing the household sector appeared, for the moment at least, to be less affected
by the financial turbulence. Quoted standard variable mortgage rates were unchanged in September.
Indeed, following the decline in swap rates, some of the rates on fixed-rate mortgages were actually
lower. There was little evidence of any marked change in the growth rate of aggregate household
credit in August. And banks reported in the <i>Credit Conditions Survey</i> that they did not expect to
reduce the availability of credit to households over the next three months.
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mpc: 9
The <i>Credit Conditions Survey</i> had been conducted before 14 September, when the Liquidity
Support Facility was announced for Northern Rock. The extent of any subsequent and prospective
tightening in bank credit was uncertain. Severe restrictions in credit supply in the past had generally
been associated with a deterioration in the asset side of banks' balance sheets, caused by economic
slowdowns, and rising defaults. By contrast, the current episode was characterised by difficulties on
the liability side of some banks' balance sheets.
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mpc: <h4>The international economy </h4>
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mpc: 10 Some of the data for the United States this month had been reasonably positive, outside the
housing market. Industrial production rose 1.1% in the three months to August, the fastest pace since
autumn 2006. On the expenditure side, consumption rose by 0.6% in August. Both of the main survey
indices from the Institute of Supply Management fell, but were broadly consistent with the rate of
GDP growth in the third quarter that the MPC had expected at the time of the August <i>Inflation Report.</i>
http://mpc.theyserveforyou.com/meetings/2007/10/3/23
mpc: 11 But the risks to the outlook for US economic activity were weighted to the downside. The
continuing fall-out from the financial market problems could bear down on household and corporate
spending. The stock of unsold new homes was at near-record levels and new home sales continued to
fall. A benign resolution of this stock overhang seemed less likely against the backdrop of the
financial market turbulence. A more prolonged correction now seemed probable, which could push
down on house prices and weaken consumption, as well as holding back residential investment.
Employment had declined in August, according to initial estimates of non-farm payrolls. That could
have been erratic, but if it signaled the start of a sustained period of weak employment, then that would
threaten consumer spending.
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mpc: 12 In the euro area, the September headline Purchasing Managers Index (PMI) for services showed
the biggest monthly fall since the series began in 1998. The decline had been particularly sharp in
Germany. The manufacturing PMI and the EC business confidence balances also fell. But as these
falls came at the end of the quarter, the surveys did little to alter the Committee's view that Q3 GDP
growth would show a rebound after a weak second quarter. Although the PMIs had fallen back only as
far as their long-run averages, it was possible that they pointed to weaker growth further ahead.
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mpc: 13 In Japan, Q2 GDP growth had been revised down to -0.3% from +0.1%, while indicators for the
third quarter had been mixed. But in the rest of Asia, the picture continued to be one of robust growth.
Overall, the story of the past few months had been one of downside news for the major economies and
upside news for the emerging market economies.
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mpc: 14 Commodity prices had continued to rise. Oil prices had reached another record high, and wheat
prices had risen sharply. In both cases, supply factors had contributed to these price rises: heightened
concerns about the impact of hurricanes on oil production in the Gulf of Mexico; and a poor
Australian wheat harvest. But the strength of a range of commodity prices, despite deteriorating
growth prospects in the OECD countries, provided corroboratory evidence of the continuing strength
of demand in the emerging market economies.
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mpc: <h4>Demand and output </h4>
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mpc: 15 In the United Kingdom, activity indicators had remained reasonably robust, with only limited
evidence so far that the problems in money and credit markets were impacting on the real economy.
But a number of external commentators had lowered their forecasts of output growth for 2008.
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mpc: 16 GDP growth in the second quarter was unrevised at 0.8%, although Q1 growth was revised up
slightly. Solid growth still looked likely for the service sector in the third quarter. But there were
signs of some easing towards the end of the quarter, with the September CIPS/NTC business activity
index falling to its lowest level for a year and the new orders balance falling slightly. The Bank's
regional Agents also reported an easing in service sector activity from its earlier strong pace. Within
the service sector, declines in sentiment were clearly more marked among financial companies:
according to the CIPS/NTC survey, business expectations in the financial intermediation sector fell
sharply; and the CBI/PwC survey balance for expected output growth in financial services fell to its
lowest level since 1991.
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mpc: 17 Manufacturing output growth looked likely to have slowed in Q3 as shipbuilding output, which
had been exceptionally high in the second quarter, returned to more normal levels. But otherwise,
underlying growth in the manufacturing sector appeared to be reasonably healthy. The CIPS/NTC
output balance had fallen back slightly in September, but the quarterly average was the highest since
1994. The expected output balance in the September CBI <i>Monthly Industrial Trends Survey</i> had
picked up, and the Bank's regional Agents reported higher growth in manufacturing output destined
for both the export and domestic markets.
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mpc: 18 On the expenditure side, the evidence on consumption was mixed. Retail sales volumes in
August had risen by 0.6%. Although the retail sales volumes balance in the CBI <i>Distributive Trades </i>
<i>Survey</i> fell in September, it still pointed to robust growth. Evidence from the Bank's regional Agents
was consistent with some slowing in consumer spending. They had reported continued easing in the
growth of retail sales values and in consumer services turnover.
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mpc: 19 There had been clearer signs of slowing in the housing market. The average of the lenders' price
indices had been broadly unchanged in September, implying that the average rise in house prices in the
third quarter as a whole was 1.3%. Both the forward and backward-looking price balances had fallen
again according to the preview of the Royal Institution of Chartered Surveyors (RICS) survey for
September. Mortgage approvals had declined in August. Both the RICS and the Bank's regional
Agents reported a further easing in housing demand this month.
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mpc: 20 It was unclear what impact the tightening in credit conditions for companies might have on
business investment. The effective rate on new corporate borrowing from banks had risen by about
100 basis points since June. But the Bank's regular liaison exercise with larger companies suggested
that there was as yet no significant impact from recent events on business investment. Companies had
other sources of funds they could draw on, for example retained profits. Some cash-constrained
smaller companies might be affected. It was also possible that any reduction in the availability of
credit would impact mainly on merger and acquisition activity, including leveraged buy-outs.
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mpc: 21
The Committee was briefed by the Treasury Representative on the broad outlines of the
Chancellor's forthcoming <i>Pre-Budget Report</i>. An assessment by Bank staff of the implications for the
economy would be undertaken following publication.
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mpc: <h4>Supply, costs and prices </h4>
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mpc: 22 According to the Labour Force Survey (LFS), employment rose by 84,000 in the three months to
July, while unemployment fell by 28,000. Unemployment also edged down on the claimant count
measure in August. Inactivity rates had risen over the past year. Vacancies had risen a little in the
three months to August. The balances in the September Recruitment and Employment Confederation
(REC) survey had recovered slightly, following the weakening that the Committee had noted last
month.
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mpc: 23 The recovery in employment had gone some way to resolving the puzzle posed by the
juxtaposition of weak employment growth and apparently elevated capacity pressures. A survey of the
Bank's regional Agents' business contacts had suggested that increasing productivity may have been
part of the explanation for the previously weak employment growth. That could explain why some
survey measures of capacity pressures were now starting to ease even though output growth remained
robust.
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mpc: 24 However, other labour market data were consistent with a weaker picture, and created further
puzzles. According to the LFS, the majority of employment growth during the past year had been in
self-employment, and there had been little change in the number of employees. Moreover, the number
of temporary workers who could not find a permanent job and the number of part-time workers who
could not find a full-time job had been recorded as increasing.
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mpc: 25 Pay growth had remained subdued. The 12-month weighted average of wage settlements was
unchanged in August at 3.2%. However, the private sector component had been edging up, offset by
falls in public sector settlements. Regular pay and total annual earnings growth had both ticked up to
3.5% in the three months to July, according to the Average Earnings Index. The REC survey
suggested pay pressures were lower than in the first half of 2007.
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mpc: 26 The news on other costs was mixed. The 12-month rate of inflation for imported goods slowed
in July, both including and excluding oil. In August, manufacturers' input price inflation rose to 0.6%,
while the corresponding measure for manufacturers' output prices was flat at 2.5%. The CIPS/NTC
manufacturing index of monthly input price inflation fell in September, while the corresponding index
for services rose. Both the CIPS/NTC indices for manufacturing and services output prices picked up.
Indeed many of the price survey balances remained above their longer-run averages.
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mpc: 27 CPI inflation had fallen to 1.8% in August. Data for September on some retailers' prices
collected from the internet pointed to a large increase in non-seasonal food prices, and the rise in oil
prices was likely to push up petrol prices from October. These developments could introduce further
volatility into CPI inflation during the coming months. But for Q3 as a whole, CPI inflation looked
likely to be lower than in the central projection in the August <i>Inflation Report</i>.
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mpc: 28 The decline in CPI inflation over the past few months had not led to a decline in the various
survey measures of inflation expectations. According to the Bank/GfK NOP survey, carried out
between 16-21 August, median expectations of inflation over the coming year were flat. And the
YouGov/Citigroup survey conducted between 20-24 September suggested that expectations of
inflation for the year ahead had actually edged up.
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mpc: <h4>The immediate policy decision </h4>
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mpc: 29 In its August <i>Inflation Report</i>, the Committee's central projection had been for inflation to fall
back to, and then settle around, the 2% target. The balance of risks to that outlook had been judged to
be a little to the upside. In the Committee's view, pressures on supply capacity had meant that some
slowdown in output growth would be necessary to keep inflation close to the target. The central
projection had been for GDP growth to slow from its recent robust levels as a higher level of Bank
Rate reduced consumption and investment growth.
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mpc: 30 Since those projections had been made, CPI inflation had fallen back to a little below 2% and
seemed likely to remain close to the target over the next few months, though it could be volatile.
World commodity prices had continued to rise. Most members thought that the evidence from the
labour market had pointed to some gentle tightening of conditions, although for one member the
evidence pointed to some easing. All members agreed that pay growth had remained muted on most
measures.
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mpc: 31 There had been only limited signs of slowing in the economy. Survey measures of business
activity had stayed firm and, if anything, pointed to slightly stronger growth in the third quarter than
had been expected at the time of the August <i>Report</i>. But there were signs that growth would ease
further ahead. Although activity in the Asian economies had remained robust, output growth in the
United States and euro area seemed to be slowing. In the United Kingdom, some surveys had
indicated that consumer spending was moderating. Indicators of housing market activity had fallen,
but were so far consistent with a gradual easing in the rate of increase in house prices rather than a
sharp correction.
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mpc: 32 The turmoil in some financial markets meant that the downside risks to activity had increased
since the August <i>Report</i>. There were signs that conditions in credit and money markets were
beginning to improve, although they were likely to remain difficult for some time. There was some
evidence that credit conditions had tightened in the corporate sector and they could tighten further.
But the extent and duration of any tightening and its impact on the rest of the economy was still
uncertain.
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mpc: 33 The Committee discussed whether the change in the balance of risks to output growth warranted
an immediate cut in Bank Rate. Credit conditions were expected to tighten and growth prospects for
the United Kingdom's main trading partners had deteriorated. A precautionary reduction in Bank Rate
could forestall a sharper slowdown in output growth than had been judged necessary to meet the
inflation target. The Committee should not wait for such a slowdown to materialise in the data before
acting. Moreover, if the downside risks did not crystallise, then any monetary easing could be
withdrawn quickly.
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mpc: 34 The Committee also discussed the arguments for leaving Bank Rate unchanged. It was
important not to prevent the slowdown envisaged in the August <i>Report</i> by loosening monetary policy
too quickly. Moreover, it did not seem that conditions in financial markets had so far had a substantial
impact on consumer or business confidence, with the exception of some parts of the financial sector.
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mpc: 35 Since the August <i>Inflation Report</i>, the sterling exchange rate had declined and short-term risk-
free interest rates had fallen. Starting from a position of strength in the economy, there was time to
consider how developments in credit conditions would affect the outlook for inflation. The
preparation of the November <i>Inflation Report</i> and its projections would give the Committee more
opportunity both to assess the impact of market turbulence and other developments in order to reach a
more considered judgement and to explain its policy stance.
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mpc: 36 A reduction in Bank Rate this month was not widely expected. There was a danger that such
action would be misinterpreted as a signal that the outlook for growth and inflation had shifted
decisively to the downside. Furthermore, the economy had just emerged from a period where inflation
had been above target. On some measures, inflation expectations remained elevated, despite the fall in
actual inflation. It was possible that a cut in rates this month could be misinterpreted as a signal that
monetary policy was focused on supporting the financial system and not on meeting the inflation
target.
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mpc: 37 Weighing all these arguments together, most Committee members concluded that Bank Rate
should be left unchanged this month. However, for one member, an immediate cut was warranted: the
Committee's central projection for activity had already looked a little high back in August; and since
then the downside risks had increased or even crystallised.
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mpc: 38 The Governor invited the Committee to vote on the proposition that Bank Rate should be
maintained at 5.75%. Eight members of the Committee (the Governor, Rachel Lomax, John Gieve,
Kate Barker, Charles Bean, Tim Besley, Andrew Sentance and Paul Tucker) voted in favour of the
proposition. David Blanchflower voted against, preferring a reduction in Bank Rate of 25 basis points.
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mpc: 39 The following members of the Committee were present: Mervyn King, Governor Rachel Lomax, Deputy Governor responsible for monetary policy John Gieve, Deputy Governor responsible for financial stability Kate Barker Charles Bean Tim Besley David Blanchflower Andrew Sentance Paul Tucker Dave Ramsden was present as the Treasury representative.<h4> </h4>
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mpc: </BODY>
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mpc:
http://mpc.theyserveforyou.com/meetings/2006/1/11/11
mpc: <h4>MINUTES OF THE MONETARY POLICY COMMITTEE MEETING HELD ON 11-12 JANUARY 2006</h4> 1
Before turning to its immediate policy decision, the Committee discussed developments in
financial markets; the international economy; money, credit, demand and output; and supply, costs
and prices.
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mpc: <h4>Financial markets </h4>
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mpc: 2
UK short-term interest rates had fallen since the Committee's previous meeting. This move had
appeared unrelated to international developments and had also been difficult to explain with reference
to UK economic data releases.
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mpc: 3
At the time of the Committee's meeting, sterling money market instruments implied an
expectation that the Bank of England's official rate would be reduced by 25 basis points in March or
April. Surveys of private sector economists also indicated a general view that the official interest rate
would be cut in 2006; survey respondents did not, however, expect a rate reduction at the
Committee's January meeting and the number of economists anticipating a cut at the February meeting
had fallen recently.
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mpc: 4
Exchange rate movements over the month had been broadly in line with changes in interest rate
differentials. Sterling's effective exchange rate index (ERI) had depreciated by around 1½% relative
to the starting point used in the November <i>Inflation Report</i>, leaving it broadly in line with its level a
year earlier. The US dollar ERI had also declined over the month. Given the large size of the US
current account deficit, market participants continued to highlight the risk of a significant dollar
depreciation. This expectation had, however, also been widely held in 2005 when the dollar ERI had
appreciated by around 10%.
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mpc: 5
Equity prices in all the major economies had increased further during the month, leaving the
FTSE All-Share index almost 9% above its starting point at the time of the November <i>Inflation Report</i>.
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mpc: 6
Nominal long-term forward interest rates in the major economies had declined over the month,
largely reflecting lower real forward rates. At the time of the Committee's meeting, 10-year real
forward rates were close to recent historical lows. There were a number of possible types of
explanation for the decline in real forward rates: first, structural changes in the world economy may
have caused real rates to fall; second, a decline in risk or term premia in international capital markets;
third, market-specific factors, particularly in the United Kingdom, relating to the demand for, and
supply of, long-maturity government bonds; and fourth, long-term forward rates may have returned to
average levels observed in some earlier periods.
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mpc: 7
These explanations were not mutually exclusive. It was important to understand the reasons why
long-term interest rates were so low. Each of the potential explanations had different implications for
the likely evolution of long-term interest rates and for movements in other asset prices.
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mpc: 8
With regard to the first potential explanation, it was possible that the decline in long-term
interest rates had reflected an increased global propensity to save and lower global willingness to
invest. Saving by China and other Asian countries had increased following the financial crises in this
region in 1997-98 and investment rates in advanced countries had fallen following the sharp declines
in equity prices between 2000 and 2002. But it was unclear why these factors might be expected to
persist well into the future, thereby lowering the level of real interest rates in the long term.
Alternatively, greater perceived vulnerability to large negative macroeconomic shocks (perhaps related
to events such as terrorist attacks or an avian flu pandemic) might have caused precautionary saving to
rise, driving real interest rates down. It was, however, difficult to square this latter explanation with
the apparently low risk premium on equities and compressed corporate bond spreads.
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mpc: 9
Turning to the second potential explanation, an excess supply of liquidity in global financial
markets might have helped to push up asset prices and compress risk premia (the so-called `search for
yield'). If this had been the dominant consideration, long-term interest rates would be expected to rise
at some point.
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mpc: 10 With regard to the third explanation, one of the most commonly cited market-specific
considerations for the lower level of sterling long-term interest rates (relative to the rates in other
advanced economies) was increased demand by UK pension funds for long-maturity bonds. This
appeared to have been triggered by the combined impact of demographic trends, growing corporate
pension fund deficits, and actions by the regulatory authorities. Taken together, these factors had led
UK pension funds to try to match the maturities of their assets more closely with the expected maturity
profile of their liabilities.
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mpc: 11 The fourth possibility was that the high real interest rates observed in the last two decades of the
20th Century may have been the unusual period. This might explain why current long-term interest
rates had moved closer into line with the levels observed in some earlier periods of history. If this
explanation were correct, it was possible that the current low level of long-term interest rates might be
sustained for some while to come.
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mpc: 12 Overall, it remained difficult to explain why long-term interest rates had fallen. Consequently, it
was also difficult to know whether there would be an upward correction in long-term rates and what
implications it might have for other asset prices.
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mpc: <h4>The international economy </h4>
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mpc: 13 Overseas indicators had suggested a strengthening of activity. World demand growth in the
second half of the year appeared to have been somewhat stronger than had been anticipated in the
November <i>Inflation Report</i>.
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mpc: 14 In the euro area, consumer and industrial confidence had picked up in the fourth quarter. The
manufacturing and service sector Purchasing Managers Indices (PMIs) had also strengthened; they
had pointed to GDP growth in Q4 at around or slightly above trend. Euro-area growth now appeared
to be on a firmer footing and had been unexpectedly strong in the second half of 2005. In the light of
this, outside forecasters had in recent months revised up their projections for growth in 2006. Looking
further ahead, however, there remained some downside risks to growth: in Germany, fiscal
consolidation was due to be implemented in 2007; in Italy, there were concerns about
competitiveness; and uncertainty over future reforms to pension and welfare benefit schemes in a
number of euro-area countries might hold back growth in consumption.
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mpc: 15 In the United States, the macroeconomic data released over the past month had been a little more
mixed than in the euro area, but generally pointed to continued firm growth. Consumption growth
appeared to have slowed in the fourth quarter and the first estimate of December non-farm payrolls had
been relatively weak. Consumer confidence had rebounded, however, from the lows associated with
Hurricane Katrina. Investment indicators remained positive and the Institute for Supply Management
reports for the manufacturing and non-manufacturing sectors pointed to continued healthy growth in
the fourth quarter.
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mpc: 16 Indicators of Asian demand had continued to be positive. In Japan, the Tankan survey of
business sentiment had improved further and industrial production growth and the manufacturing PMI
balance had strengthened. The Chinese authorities had significantly revised up their estimates of both
the level and growth rate of Chinese GDP; but trade statistics had been unrevised and so the
implications of these revisions for the Committee's UK forecast were limited.
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mpc: 17 The Committee reviewed the evidence from some recent external studies of overseas housing
markets. These had generally suggested that national housing market valuations in the United States
and most euro-area countries were not far above what would be suggested by their fundamental
determinants. However, if long-term interest rates were to rise, this would no longer be the case. And,
as the Committee had noted, there was great uncertainty over the likely evolution of long-term interest
rates.
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mpc: 18 The dollar spot price of Brent crude oil had increased by 10% over the month but remained
below the peaks reached in 2005 whether measured in sterling or dollars. Consumer price inflation in
the United States and euro area had fallen back in November, largely due to declines in retail energy
prices at that time.
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mpc: <h4>Money, credit, demand and output </h4>
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mpc: 19 The annual growth rate of the M4 money aggregate had increased to 12.1% in November, its
highest rate since 1990. In contrast, however, the latest growth rates for notes and coin and unsecured
lending to individuals had slowed. The annual growth rate of secured lending to individuals in
October and November had been broadly unchanged from that seen in the third quarter.
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mpc: 20 The latest vintage of the <i>Quarterly National Accounts</i> had included revisions to historical data
going back to 2004 Q1. These revisions indicated that the slowdown in GDP growth in the second
half of 2004 had been a little less marked than previously reported. This, in turn, had moved the
official data closer into line with estimates of growth derived from both an assessment of surveys and
evidence from the historic pattern of revisions made by the Office for National Statistics (ONS). On
the output side of the accounts, the revisions to GDP primarily reflected a less marked slowdown in
service sector growth in 2004; and on the expenditure side, the revisions mainly reflected a less
marked slowdown in consumption growth over the same period. The ONS had left its estimates of
quarterly GDP growth rates in 2005 unchanged. Evidence from surveys and the pattern of past
revisions to the ONS data tended to suggest that these 2005 growth rates might ultimately be revised
up somewhat, principally reflecting stronger service sector growth than indicated in the current vintage
of the official data.
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mpc: 21 Output indicators had suggested that GDP in Q4 had risen at close to its historic average rate. In
the services sector, the CIPS business activity index had increased to 57.9 in December, its highest
level since April 2004. In addition, the CIPS survey responses for employment and business
expectations for the year ahead had also picked up, suggesting that the improvement seen in December
might be sustained into 2006. The CIPS survey balance for manufacturing output had increased
between Q3 and Q4. However, official figures suggested that manufacturing output growth remained
much weaker than service sector growth; comparing the three months to November with the previous
three months, manufacturing output had contracted by 0.8%.
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mpc: 22 Consumption growth in the third quarter had been revised up slightly and spending indicators for
the fourth quarter had appeared reasonably firm. Retail sales had increased by 1% in the three months
to November and retail sector surveys had pointed to continued healthy spending in December. Retail
contacts of the Bank's regional Agents had indicated a similar picture for the Christmas period. In
contrast, however, private car sales and consumer confidence had remained weak.
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mpc: 23 The pickup in consumption growth in the second half of 2005 might have reflected a normal
cyclical rebound following a period of weak consumption, together with a reaction to the reduction in
interest rates in August. In addition, housing market indicators had generally come in slightly stronger
than expected in recent months. In contrast, however, the latest vintage of official data had suggested
that the growth rate of real post-tax labour income had slowed in 2005.
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mpc: 24 Whole economy investment growth in Q3 had been revised up to 1.6%. The growth in whole
economy investment largely reflected stronger government investment; business investment growth
had been weaker than expected. The sluggishness of business investment appeared somewhat
surprising given the low levels of long-term interest rates, the pickup in both corporate profitability
and equity prices, and the rise in investment growth in other advanced economies.
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mpc: 25 The Committee considered a number of potential explanations for the weakness of estimated UK
business investment. First, the official data was particularly prone to revision and might be revised
higher. Second, multinational firms might have decided to allocate more of their investment spending
to overseas projects, reflecting the lower wage costs in many emerging market economies. Third,
some of the investment undertaken by service sector firms (such as in-house software design) might
not have been picked up in the official statistics though it was difficult to know whether or not this
consideration had become more marked in the recent past. Fourth, there was some anecdotal evidence
to suggest that firms may have chosen to cut back on investment spending in order to improve the
financial position of their in-house pension funds. Finally, higher and more volatile energy prices
might have increased the uncertainties about the likely returns of investment projects.
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mpc: 26 Domestic demand growth in Q3 had been a little stronger than expected, reflecting upward
revisions to consumption and investment. That had been offset, however, by a larger drag from net
trade due primarily to a 0.4% decline in exports. The fall in exports had been difficult to reconcile
with the pickup in euro-area demand and the slight improvement in survey-based evidence of export
orders. It was possible that the Q3 figures had been erratically weak following the very strong Q2 data
or that they had continued to be affected by fraudulent activity.
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mpc: <h4>Supply, costs and prices </h4>
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mpc: 27 The broad picture of the labour market was little changed from a month earlier. The Labour
Force Survey measure of employment had increased by 0.2% in the three months to October and the
various survey-based indicators of hiring intentions in the service and construction sectors had
continued to point to a gradual strengthening of employment growth. Despite these developments, the
unemployment rate had ticked up slightly, largely reflecting more individuals coming back into the
labour force to look for jobs.
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mpc: 28 The annual growth rate of private sector labour productivity had fallen to close to zero in Q3.
The Committee had revisited the potential explanations for this weakness: data mismeasurement (of
either employment or output); cyclical labour hoarding; or a genuine slowdown in underlying total
factor productivity growth. Survey-based evidence suggested a possibility that the GDP growth
figures might be revised up somewhat, but there were fewer reasons to expect employment to be
revised down. In principle, labour hoarding might be expected to result in some fall in average hours
worked. There had, however, been little cyclical change in average hours worked over the past two
years. Previous growth slowdowns over the past decade had shown similarly muted cyclical responses
of hours worked. Consequently, it was plausible that the current slowdown in productivity growth had
primarily reflected normal cyclical considerations such as labour hoarding. However, this explanation
might not account for all of the productivity slowdown. There remained a possibility that underlying
total factor productivity growth had slowed. Each of these potential explanations had different
implications for the likely evolution of inflation.
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mpc: 29 There continued to be few signs that employees had been bidding up wages in response to higher
energy prices. Both wage settlements and regular pay growth had been broadly unchanged in recent
months, while the annual growth rate of the whole economy average earnings index had fallen to 3.6%
in the three months to October due to a decline in the contribution from bonuses. Anecdotal
information had suggested a general expectation that wage agreements to be struck in January (a
significant month for settlements) were likely to be broadly in line with developments seen in recent
months. More information about the January pay round would become available in the next couple of
months.
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mpc: 30 Manufacturing input price inflation had increased to 12.5% in November, partly reflecting a
sharp increase in gas prices that month. Not all of these increased input costs had, however, been
passed through to output prices; manufacturing output price inflation had fallen back slightly in
November and remained at a much lower level than input price inflation. In December, the CIPS
output price balances for both services and manufacturing had increased.
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mpc: 31 Since the severe price spike in November, wholesale gas prices had fallen back significantly.
Nevertheless, wholesale gas prices had continued to trade at around double the levels observed
between April and October 2005. Information from the gas futures market had suggested an
expectation that the average level of wholesale gas prices in 2006 might be 60% higher than in 2005.
If realised, this increase could have a potentially significant impact on consumer price inflation. There
were, however, a number of uncertainties in this area. These included: the predictive power of gas
futures prices; the extent to which retail gas providers were likely to pass on the increase in the
wholesale gas price to their customers; and the extent to which a rise in the relative price of gas might
have knock-on implications (up or down) for the prices of other goods and services in the CPI basket.
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mpc: 32 CPI inflation had declined to 2.1% in November. In line with pre-release arrangements, an
advance estimate of CPI inflation for December had been provided to the Governor ahead of
publication. This had indicated that inflation had fallen further to 2.0% in December.
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mpc: <h4>The immediate policy decision </h4>
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mpc: 33 Against this backdrop, there were a number of arguments in favour of leaving the Bank's official
interest rate unchanged, to which different members attached different weights.
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mpc: 34 World demand growth had been slightly stronger than expected, particularly in the euro area.
UK growth had probably picked up towards its historic average rate and had been broadly in line with
the central projection contained in the November <i>Inflation Report,</i> albeit with a slightly different
composition of growth. Business investment and exports had been weaker than expected and
continued to pose a downside risk to the outlook. But, indicators of service sector output, consumption
growth and the housing market had been stronger than expected. Finally, financial market movements
should provide some stimulus to demand. Taking this evidence together suggested that growth was
likely to continue broadly in line with its historic average rate in the next few quarters.
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mpc: 35 Consumer price inflation had returned to the target, inflation expectations appeared to be well
anchored, and there had been few signs of second-round wage pressures related to higher oil prices.
There was probably some spare capacity in the economy following the period of below-trend growth
and this might be expected to put downward pressure on future inflation. But the extent of spare
capacity was uncertain, particularly if there had been some negative effects on potential supply from
the recent weakness of business investment and productivity. In the short-term, upside risks to
inflation from higher oil and gas prices remained. In addition, there were uncertainties surrounding the
likely evolution of import prices and the exchange rate, which were important influences on the
outlook for inflation. On balance, it seemed likely that inflation would be broadly in line with the
target over the medium term.
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mpc: 36 For one member there was a case for an immediate reduction in the repo rate. GDP growth had
been below trend for some while. Reflecting this, unemployment statistics and surveys of capacity
utilisation pointed to the emergence of spare capacity in the economy. While the outlook for
consumption had improved, the November <i>Inflation Report</i> central projections for investment and net
trade appeared too optimistic. In addition, the growth rate of government consumption spending was
likely to slow from 2007. Consequently, it appeared unlikely that the degree of spare capacity in the
economy would diminish by as much as had been envisaged in the November <i>Inflation Report</i>. Given
that pipeline price pressures were modest, it seemed likely that inflation would fall below the target
once the effects of higher energy prices had dropped out of the year-on-year calculations.
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mpc: 37 The Governor invited the Committee to vote on the proposition that the repo rate should be
maintained at 4.5%. Eight members of the Committee (the Governor, Rachel Lomax, Andrew Large,
Kate Barker, Charles Bean, Richard Lambert, Paul Tucker and David Walton) voted in favour.
Stephen Nickell voted against, preferring a reduction in the repo rate of 25 basis points.
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mpc: 38 Finally, the Governor expressed his appreciation to Sir Andrew Large for his contribution as a
member of the Committee.
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mpc: 39 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 Richard Lambert Stephen Nickell Paul Tucker David Walton Jon Cunliffe was present as the Treasury representative.<h4> </h4>
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mpc: </BODY>
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mpc: <h4>MINUTES OF THE MONETARY POLICY COMMITTEE MEETING HELD ON 8-9 FEBRUARY 2006</h4> 1
Before turning to its immediate policy decision, and against the background of its latest
projections for output and inflation, the Committee discussed developments in financial markets; the
international economy; money, credit, demand and output; and costs and prices.
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mpc: <h4>Financial markets </h4>
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mpc: 2
Domestic short-term interest rates had ended the month a few basis points higher than at the time
of the January meeting. Sterling money market instruments implied that interest rate expectations
were broadly flat over the next year or so, and were close to where they stood at the time of the
November <i>Inflation Report</i>. According to the Reuters survey, the mean expectation of private sector
economists had remained for one interest rate reduction this year.
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mpc: 3
Both UK and US long-term implied forward interest rates had been little changed on the month,
though in each case there had been a small fall in forward real interest rates offset by a small rise in
inflation expectations. There had been a rise in long-term forward rates in the euro area, the reasons
for which were unclear.<h4> </h4>
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mpc: 4
The sterling effective exchange rate index (ERI) had been flat over the past month, but had fallen
by around 1% since the time of the November <i>Inflation Report</i>. Looking back over a longer period,
sterling had been broadly stable within a fairly narrow range. The dollar had appreciated over the past
month against both the euro and yen. The movement in the dollar-euro exchange rate was perhaps a
little surprising given the upward shift in longer-term euro-area interest rates.
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mpc: 5
Equity prices were little changed over the past month in the United Kingdom and the euro area,
while the US S&P 500 index had fallen a little. Most major equity price indices had remained
significantly higher than at the time of the November <i>Inflation Report</i>.
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mpc: <h4>The international economy </h4>
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mpc: 6
After several months of generally positive news on activity, the latest indicators for both the
United States and the euro area had seemed more equivocal.
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mpc: 7
In the euro area, the retail sales and trade data had pointed to slightly slower growth in 2005 Q4
than thought a month or two ago. However, this slight reassessment of the likely outturn for Q4 did
not alter the picture of a steady recovery in growth, with the services Purchasing Managers Index
(PMI) and the European Commission industrial confidence balance both strengthening. A key
question remained whether consumption growth would pick up further. But with signs that firms were
expecting to employ more labour and household borrowing strong, the outlook seemed fairly positive.
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mpc: 8
Growth in the United States had slowed to 0.3% in Q4, the slowest quarterly growth rate since
2002. Although the slowdown was broadly based across expenditure categories, there were a number
of reasons for discounting the slowdown as erratic. These included: the impact of the hurricanes on
both consumption and the production of oil and gas; the unwinding of incentives on auto purchases;
the impact of a strike at Boeing on investment; and an erratic fall in defence spending. Consequently,
GDP growth seemed likely to bounce back in Q1. That being said, some of the January indicators had
been a little weaker than expected, for example the latest non-farm payrolls data and the non-
manufacturing purchasing managers' index<h4>. </h4>
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mpc: 9
There was a possibility that there might be a more sustained period of adjustment in the United
States, particularly in the housing market, with house sales and housing construction indicators both
easing recently. The house price inflation rate had fallen in November and December, while forward-
looking indicators of activity had also edged lower in recent months. A slowdown in the US housing
market would probably have implications for consumption and private residential investment. But just
as in the United Kingdom, the correlation between house price inflation and consumption growth had
fallen in recent years, and so although some further dampening of consumer spending was possible, it
was not clear how far any adjustment in the housing market would affect consumption growth.
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mpc: 10 The latest Japanese indicators appeared to confirm that the weakness in growth in Q3 had been
temporary, and pointed to a rebound in Q4. The rest of Asia still seemed to be growing strongly.
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mpc: 11 Oil prices had risen through most of the month, but had fallen back just before the policy
meeting to end the period broadly unchanged. This volatility seemed largely to reflect concerns about
the potential for oil supply disruptions in Nigeria and the Middle East. There remained significant
uncertainty about the future path of oil and other energy prices. Option contracts suggested that
financial market participants thought the risks to future oil prices were skewed to the upside. Non-oil
commodity prices had increased strongly in recent months, which seemed likely to reflect the
acceleration in world industrial production and expectations of continued growth.
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mpc: 12 Core measures of both producer and consumer price inflation in the United States and the euro
area had remained subdued, but headline measures of consumer price inflation had been a little higher.
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mpc: <h4>Money, credit, demand and output </h4>
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mpc: 13 The preliminary estimate for GDP growth in the United Kingdom was 0.6% in Q4. Service
sector growth had picked up significantly. The subsequent industrial production release showed that
manufacturing output had fallen by 1% in Q4, which was weaker than had been assumed by the Office
for National Statistics (ONS) in the preliminary GDP release. The surveys for manufacturing had
remained more upbeat than the official output data. It was difficult to know how much of the recent
weakness was due to cyclical developments, and how much was the continued influence of longer-
term structural factors, such as increased competition from low-cost producers in emerging market
economies. Energy production had risen a little in Q4, rebounding from the very weak level in Q3.
Over the longer term it had been on a declining trend.
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mpc: 14 The output indicators for Q1 had remained reasonably strong. The CIPS/RBS services business
activity index had fallen slightly following the strong rise in December, but remained above the broad
range it had occupied for much of the past two years. The CIPS/RBS manufacturing index had
remained unchanged in January. Taken together, the surveys pointed to slightly faster GDP growth in
2006 Q1 than in 2005 Q4. It was important not to place too much weight on small movements in
measured GDP growth rates from quarter to quarter, given that the profile might look somewhat
different after the ONS had received more information, and the data had gone through the normal
cycle of revisions.
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mpc: 15 As far as the expenditure data were concerned, a key question remained the near-term strength of
consumption. Retail sales had risen strongly in Q4, and at the fastest rate since 2004 Q2. The BRC-
KPMG <i>Retail Sales Monitor</i> and CBI <i>Distributive Trades Survey</i> both suggested some moderation in
the pace of growth in January. Vehicle registrations had remained weak. The Bank's regional Agents
suggested that consumer services growth had picked up.
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mpc: 16 The recent slackening of employment growth and the rise in unemployment could weigh on
future consumer spending growth. However, housing market activity and prices continued to point to
a pickup in the housing market. This could be indicative of strengthening confidence and reduced
uncertainty on the part of households. The average of the lenders' house price indices had risen 1¾%
in the three months to January compared with the previous three months, and loan approvals for house
purchase had risen back towards the levels recorded in the second half of 2003 and first half of 2004.
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mpc: 17 While secured lending growth had remained above 10% at an annualised rate, which was
consistent with the strengthening housing market, the growth rate of unsecured credit had slowed in
recent quarters. The average monthly flow of unsecured credit had now fallen to around half the rate
of a year ago. Within unsecured credit, the annual rate of growth of credit card lending had also
halved over the past year. The annual growth rate of the M4 monetary aggregate had increased to
12.6% in December, the highest rate since 1990.
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mpc: <h4>Costs and prices </h4>
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mpc: 18 The Labour Force Survey (LFS) measure of the unemployment rate increased to 5.0% in the
three months to November, the highest since 2003. That rise in unemployment reflected both an
unexpectedly weak employment rate, and an unexpectedly high participation rate. The slackening in
the employment rate might have reflected the beginning of an unwind in the labour hoarding that had
been a possible explanation for the low productivity growth recorded recently. If that were the
explanation, it was possible that employment growth could remain subdued for at least another quarter
or two. Against that, there were some signs from business surveys that this slowing would prove
temporary. The Bank's regional Agents had reported that companies, on average, were planning to
increase employment, particularly in business services.
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mpc: 19 There had been little news on pay settlements since the January meeting. The annual rate of
regular pay growth ticked down, and overall earnings growth fell sharply in the three months to
November. The Bank's regional Agents had reported the results of an informal survey which indicated
that pay settlements and pay growth might edge up a little this year. It was too early to