April MPC Minutes: The Key Points

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The decision:

The MPC voted to maintain the Bank Rate at 0.5% and continue with asset purchases totalling £325bn

All nine members of the committee voted in favour of maintaining the Bank Rate. Only David Miles voted against maintaining the level of asset purchases, favouring an increase of £25bn.

The committee noted the recent unexpected falls in manufacturing output and construction seen in ONS data this year and thought that this (combined with the mechanical affect of an additional Bank Holiday as a result of the jubilee) might mean that GDP would fall in the first and second quarters of this year. In addition, Euro area instability continues to present a risk to the UK economy. However, it was felt that underlying activity had probably picked up since the second half of 2011.

CPI has started to fall back, though at a slightly slower rate than had previously been expected, meaning the path for inflation was likely to be higher than that forecast in the most recent inflation report.

Upside risks to inflation:

  • Rising oil and commodity prices
  • Domestic companies seeking to rebuild margins to improve cashflow
  • Nominal wage growth outpacing productivity improvements

Downside risks to inflation:

  • Demand too weak to absorb the margin of spare capacity in the economy
  • Potential for further economic contraction might dampen business and consumer confidence
  • Households and businesses building up a buffer of savings might slow growth

Economic developments over the month:

(NB the MPC's meeting was held before much of the recent escalation in Spanish government bond yields)

Financial markets

  • Conditions in financial markets continue to normalise
  • Functioning of bank funding markets had improved
  • Fall in short-term funding costs in the Euro area

International markets

  • Global PMIs suggest that growth rates were similar to those seen in the first half of 2011
  • Euro area PMIs, however, suggested that economic activity in the region was weak
  • Steps to restructure Greek debt had been agreed
  • US growth looking stronger
  • Chinese data consistent with gentle slowing in activity
  • Oil prices remained elevated, compared with the start of the year but increased little over the month

Money, credit, demand and output

  • UK GDP fell in the fourth quarter of 2011
  • Manufacturing output fell in February, though this was at odds with more positive business surveys
  • Service sector surveys suggest growth in the first quarter
  • Construction saw another large contraction, which is likely to depress GDP growth in the first quarter of 2012
  • Credit conditions likely to remain tight

Supply, costs and prices

  • CPI down to 3.4% in February (since the meeting CPI inflation was reported as 3.5% in March). The fall was a little less than expected
  • CPI likely to be higher than previously forecast
  • Picture from labour market mixed, with unemployment elevated and wage settlements running at about 2.5%

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