Summary of MPC Minutes from 5-6 October meeting

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This is a summary of the MPC minutes - you can find the full version here.

Financial markets

• Increased stress in financial markets associated with euro governments and banks is reflected in volatility in asset prices and a reduction in liquidity across a range of markets.

• Stresses on short-term funding markets are driving up costs for European banks, including UK banks. Domestic lending in the UK could be affected if higher costs persist.

International economy

• European activity indicators have weakened, particularly in the periphery, but indicators even for France and Germany suggest flat output.

• U.S. indicators mixed with encouraging signs of investment in quarter 3 like to be short-lived as business and consumer confidence are weak. The passage of Obama's $450 billion stimulus bill through Congress looks uncertain.

• Some gradual slowing in activity in China. The rebound in activity in Japan following the earthquake and tsunami also looks to be short-lived with weak prospects beyond 2011q3.

Money, credit, demand, and output

• The latest revisions to national statistics have revised up the contribution of net trade to growth from the onset of the financial crisis through the recession and into the recovery. This is now more in line with what was expected given the depreciation in sterling.

• Business surveys suggest weak growth in 2011q3 in both services and manufacturing sectors.

• Mixed evidence on the weakening of external demand for UK exports with CIPS/Markit PMI suggesting falling demand but other surveys suggesting this is holding up, particularly to markets outside Europe.

• Credit conditions have remained tighter since the financial crisis but no sign yet that recent financial market turbulence has tightened conditions still further.

Supply, costs, and prices

• MPC expected inflation to rise above 5% in the short term [as it has, to 5.2%] before falling back sharply in 2012 as VAT and oil price rises fall out of the series.

• Inflation expectations as measured by surveys of households remain unchanged while implied expectations through financial markets have fallen somewhat – though such implied expectations are volatile in times of financial stress.

• Excluding the impact of bonuses in some sectors, recent data suggests wage growth remains modest.

• The degree of slack in the labour market is a key factor in determining how much additional downward pressure there will be on inflation.

Immediate policy decision

• The main upside risks to inflation in the medium term are expectations of higher inflation becoming embedded in wage and price-setting behaviour, lower spare capacity in the economy than thought, and another rise in commodity prices.

• No recent data suggest any strengthening in the upside risks.

• The main downside risk to inflation in the medium term is weak demand being unable to absorb the spare capacity in the economy.

• Ongoing problems in the eurozone area and the strains these are putting on financial markets have increased recently and the outlook for the UK economy had weakened.

• The MPC voted unanimously for Bank Rate to be maintained at 0.5% and also unanimously to finance a further £75 billion of asset purchases (QE).

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