B of E MPC minutes show that rate rise is further away
The latest set of minutes from the Bank of England’s last Monetary Policy Committee (MPC) meeting on the 6-7th July has been released and they reveal that the possibility of a rise in interest rates in the near term has fallen.
The MPC voted 7-2 to keep base rate at 0.5 per cent just as they did in June. Once again B of E chief economist Spencer Dale and external member Martin Weale voted to raise rates. New member Ben Broadbent voted for base rate to remain at 0.5 per cent.
Overall, the MPC judged that the economic performance and indicators published in the month before the meeting showed that the economy is too weak to withstand a rise in interest rates at this time.
The minutes said that the MPC expect to see low levels of growth for the 2nd quarter of GDP, the first estimate of which will be released next week, but that the outlook for the third quarter showed signs of being even weaker, especially concerning the risk of contagion around the eurozone debt crisis which has pushed up funding costs for UK banks.
Inflation fell to 4.2 per cent in June but the MPC believes it will increase further before easing back in the direction of the bank’s target of two per cent in 2012.
The report said: “Despite the fall in CPI inflation in June, it was likely that inflation would rise further, to over 5%, in the coming months. In the light of recent developments in utility and food prices, the peak in inflation was likely to be a little higher and come sooner than the Committee had previously expected.”
Looking at the possibility of changing its monetary policy, the minutes said: "If it were to become clear that one of those risks had crystallized - and the medium-term outlook for inflation had deviated materially from the target in either one direction or the other - the Committee would respond by changing the stance of monetary policy."
Many analysts were expecting to see further hints about the possibility of a further injection of quantitative easing (QE) to boost the economy but although once again MPC member Adam Posen voted to increase QE there was no explicit mention of it.
Next week will see the first estimate of how the UK economy fared in the second quarter with the release of GDP figures. Many economists expect these to show less growth than the 0.5 per cent that was seen in the first quarter and this has led most analysts to predict that interest rates will not go up until the second half of 2012.
Howard Archer from IHS Global said: “The underlying tone of the minutes comes across as distinctly more dovish, which indicates that any hiking of interest rates is disappearing further into the future. Critically, the minutes note that “it was likely that the current weakness in activity would persist for longer than previously thought.”
“Monetary policy will need to stay loose for an extended period to offset the impact of the major, sustained fiscal squeeze. In addition, we do believe that inflation will fall back markedly from late-2011/early-2012. Consequently, we suspect that interest rates will only rise to 1.50% by the end of 2012,” added Mr Archer.
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