Background to the decision:
- Market expectations of a rate rise now mid-2012
- Euro-area sovereign debt markets are more strained.
- The cost of bank funding in wholesale markets had remained elevated internationally, reflecting sovereign debt and banking sector strains
- Broad-based easing in the pace of global activity
- Output in US weakened more than recent supply-chain disruptions following the Japanese tsunami could explain
- Euro area seen moderate growth but significant divergence
- Oil prices fell slightly over the month
- Weak underlying growth, particularly from domestic demand
- Business surveys had been softer, linked to the slowdown in global activity
- Continued weakness in consumption expected
- Indicators of cost of credit to households and businesses remained elevated
- CPI inflation fell back to 4.2% but food and energy prices mean the near-term peak is likely to be higher
- Remain significant risks that expectations of above-target inflation would become entrenched
- Little evidence to suggest that CPI inflation had begun to feed through into wages
- Labour productivity growth has been weaker than expected
- Pace of employment growth has begun to slow
Despite June's fall in CPI, it was felt that inflation was likely to rise furtherthough the margin of spare capacity should still push down inflation in the medium term
Key downside risk: demand growth too weak to soak up spare capacityKey upside risk: expectations of above-target inflation would become entrenched.
Overall the balance of risks had not changed significantly over the month. Risks remained substantial in both directions. Most members judged it was appropriate to maintain the current stance of monetary policy.
The voting pattern remained the same, with Spencer Dale and Martin Weale calling for a 25 basis point rate rise; and Adam Posen calling for an increase in the asset purchase programme of £50bn.