MPC united on interest rates as recovery slows

For the first time in more than a year, every single member of the MPC voted against an interest rate increase

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The Independent Online

All nine members of the Bank of England's Monetary Policy Committee voted to hold interest rates at a low of 0.5 per cent this month, marking a shift towards a more cautious stance.

The minutes of the August MPC meeting, published yesterday, show unanimity on interest rates for the first time in more than a year. Spencer Dale, the Bank's chief economist, and Martin Weale, one of the externalappointees to the committee, both changed their view from July, when they had voted for a 0.25 percentage point increase in the cost of borrowing. As recently as May, three MPC members voted for a rate rise.

The softening of the MPC's tone reflects the poor economic data published in recent months – including the 0.2 per cent growth posted by the UK economy during the second quarter of the year – as well as fears of potential shocks to come.

These include fall-out from the sovereign debt crisis in the eurozone, as well the impact of the slowdown in the pace of the global recovery, with countries such as the US and Germany continuing to falter. For now, the MPC has rejected returning to anexplicit attempt to stimulate the economy, voting not to increase the size of the Bank's quantitative easing (QE) programme.

The Bank has already reached the maximum £200bn of QE agreed by the MPC, but only one member, Adam Posen, voted to increase the scale of the stimulus this month.

Still, the minutes show the MPC is moving towards Mr Posen's position. Several members had considered joining him in voting for more QE.

"Those members concluded that the case was not yet strong enough, particularly in light of the lower path for bank rate now implied by financial markets," the Bank said.

"Further asset purchases might nonetheless become warranted were some downside risks to materialise."

The Bank of England has faced criticism for its continuing failure to bring inflation down closer to the 2 per cent target. Earlier this week, the Bank's Governor, Sir Mervyn King, was forced to write another letter to the Chancellor explaining that failure, with the consumer price index showing prices rising at 4.4 per cent in July.

The MPC minutes, however, show committee's members remain relaxed about the inflation outlook, in line with the Bank's view that pressures will moderate as external shocks such as commodity price increases begin to ease later this year. The MPC pointed to a continued trend in low wage settlements: with the average UK pay rise well below 3 per cent, there is no sign of an inflationary cycle kicking in.

Economists at the Ernst & Young Item club described the MPC minutes as "more doveish".

James Knightley, an economist at ING Financial Markets, said: "[They] add weight to the view that a hike in interest rates remains a distant prospect – at least 12 months in our view – while an expansion of quantitative easing remains a clear possibility."