It was what the Bank of England said rather than what it did that excited interest in the City yesterday. The Monetary Policy Committee's decision to leave rates unchanged at 5.75 per cent was widely expected. The European Central Bank also left its benchmark borrowing rate at 4 per cent, as widely thought. What was surprising was that the Bank of England issued an accompanying statement, signalling that its awareness of market conditions. It is only the third time in the decade-long history of the MPC it has done so when it left rates on hold (the last occasion being May 1999).
"In recent weeks, heightened concerns about a variety of asset-backed securities have led to disruption around the world, not only in markets for those financial instruments but also in money markets more generally," said the MPC's statement. "It is too soon to tell how far the disruption in financial markets will impair the availability of credit to companies and households. The MPC is monitoring closely the evolution of both credit spreads and the quantities of credit extended, alongside all other data relevant to the outlook for inflation".
Short-term money market rates (Libor) are well above the bank's rate, and the MPC seems keen not to exacerbate that. However, the Bank sounded a note of caution: "CPI inflation fell back to 1.9 per cent in July and may remain around, or alittle below, the 2 per cent target for the next few months. Pay pressures remain muted. There are tentative signs of a slowing in consumer spending. But the recent solid pace of output growth has been sustained and the margin of spare capacity appears limited. Indicators of pricing pressure remain somewhat elevated."
The Bank's stance was welcomed. Ian McCafferty, chief economic adviser at the CBI said: "High street retailers have had a disappointing summer, household budgets are under pressure, and the recent markets turmoil is another reason for caution. A long period of stability is what the economy now needs." Philip Shaw, at Investec, added: "Even if current conditions were to persist without getting worse, there would be spillover effects into the real economy as banks facing significant increases in their borrowing costs, or even worse an inability to borrow at all, would curb the expansion of their balance sheets and scale back their own lending. The downside risks to the real side of the economy from credit markets suggest that a hike is off the cards now".
Meanwhile, the European Central bank also moved to calm jittery money markets, with rates on hold, another injection of liquidity (¿42.2bn) and some soothing words. The ECB's president, Jean-Claude Trichet, signalled that no rate increase is likely next month either, and added that providing extra liquidity was "essential as an element of confidence". He pledged to "methodically look at all components of all global finance and our own financial system. We all have to prepare for a better functioning of a system that is very complex. If I had a word ... that I think is appropriate, it is increased, improved transparency."
He promised the ECB would provide funds "at whatever price at whatever interest rates the market has to function". Trichet also stressed that keeping inflation in check "is all the more important at times of financial market volatility and increased uncertainty".
The ECB's decision provoked a minor spat with Nicolas Sarkozy. The French President had called for the ECB to loosen monetary policy to help economic growth, and yesterday claimed "It proves that ... talking about (interest rates) and raising the issue has yielded some small results". M. Trichet refuted the suggestion of a lack of independence: "We are independent because the EU treaty ... calls on executive branches in Europe not to seek to influence the central bank. Nobody thinks we could be influenced, the world over."Reuse content