August MPC minutes – the key points | EEF

August MPC minutes – the key points

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Market turmoil as the global recovery looks less certain

  • Markets had been unsettled during the month, particularly in the few days before the committee's meeting
  • Markets concerned about sustainability of debt, and growth prospects
  • Implied expectations of when UK rate would rise were pushed further into the future

International economy weaker

  • Data pointed to broad-based global slowdown
  • One-off factors such as Japanese tsunami impacted on global growth, but other indicators (such as US labour market) suggested underlying growth may have weakened too
  • It is likely that tighter monetary policy in emerging economies (particularly China) will weigh on the pace of demand growth

UK not immune to slowdown

  • Weak growth in second quarter, though partly a result of temporary factors
  • MPC expects a gradual recovery in the pace of activity in the near term
  • Nevertheless, export orders fell back and slow consumption growth is still considered likely
  • Continuing fiscal consolidation and restrictions on the supply of credit likely to weigh on demand

Inflation should fall below target in the medium term

  • CPI inflation likely to peak at 5% as a result of energy price rises
  • Little evidence that above-target inflation has fed through to wage expectations
  • Over the medium term slower growth should bear down on inflation
  • Outlook for inflation remains sensitive to commodity and energy prices

Key upside risk: potential impact of above-target inflation on wage expectationsKey downside risks: demand growth being too weak to absorb spare capacity in the economy; instability in the euro area hitting growth in the UK through reduced exports and financial turmoil

“There remained substantial risks to inflation in the medium term in both directions. But overall the news on the month had increased the downside risks. Committee members considered the cases for different policy actions.”

The decision

Interest rates and the size of the asset purchase scheme were maintained.

All members voted in favour of holding the base rate at 0.5%. Adam Posen voted in favour of extending Quantitative Easing.

The minutes in full are available here


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