MPC votes 9-0 to hold base rate but prepares ground for more QE
Wednesday, 21 September 2011 10:02
The Bank of England’s Monetary Policy Committee (MPC) once again voted 9-0 to keep base rate at 0.5 per cent, the minutes from the meeting, released today, reveal.
The comment from the meeting makes an increase in interest rates even more improbable. Weak retail, construction and manufacturing indexes that have come out over the past month, along with a rise in inflation and unemployment indicate that the MPC believe the economy is too weak for an imminent rise.
The MPC also voted on expanding its programme of asset purchases, or quantitative easing, and although the minutes reveal that “Most of these members thought that it was increasingly probable that further asset purchases to loosen monetary conditions would become warranted at some point,” the voting pattern remained the same as last month, with just one member voting for an immediate increase in quantitative easing (QE) with the MPC voting 8-1 to keep the asset programme at £200 billion for now.
Adam Posen voted for an immediate increase of QE by £50 billion. The minutes comment on Mr Posen’s view, saying: “For one member, the balance of risks to inflation had further strengthened the case for an immediate expansion of the Committee’s programme of asset purchases, financed by the issuance of central bank reserves.”
Another extract from the MPC minutes that points to a return of QE was: “For some members, a continuation of the conditions seen over the past month would probably be sufficient to justify an expansion of the asset purchase programme at a subsequent meeting.”
In the run up to the meeting there were a number of weak economic surveys, suggesting that the economy is not growing at a rate to warrant a rise in interest rates.
Howard Archer, Chief UK & European Economist for IHS Global Insight said that the minutes increase the likelihood of more QE in the near future. He said: “The minutes of the September MPC meeting are appreciably more dovish, opening the door wide to more Quantitative Easing by the Bank of England and very possibly sooner rather than later.”
On inflation, the Consumer Prices Index (CPI) was at 4.4 per cent at the time of the rate-setting meeting on September 8th, but which subsequently increased to 4.5 per cent when August figures were released by the Office for National Statistics (ONS) on September 13th, the minutes said: “There remained substantial risks to inflation in the medium term in both directions. While there had been little news on the upside risks to inflation, the downside risks had clearly increased further.
The Committee’s view remained that the most likely near-term path for inflation was for a temporary rise to a peak of over 5% before the year end, in part reflecting announced utility price changes. Inflation was then expected to fall back sharply in the first part of 2012.
The voting patterns of the MPC mean that a hike in base rate is even more unlikely for the foreseeable future. The bank has held rates at 0.5 per cent since March 2009
The decision of the MPC was taken against a backdrop of worsening debt developments in the eurozone.
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