MPC Minutes (Feb 2012) - Key Points

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Published

The decision:

The bank rate was held at 0.5% and the asset purchase programme was extended by £50bn to £325bn.

All nine members voted to extend the asset purchase programme. Two members voted for a £75bn increase.

Recent developments:

Financial markets

  • European financial markets fared better since the the ECB's additional long-term refinancing options (LTROs) in December.
  • Short-term bank funding markets had also improved.
  • Spanish and Italian bond yields had come down, though remained elevated.
  • UK short-term interest rates had changed little over the month.
  • Equity indices had started to improve.

The international economy

  • Upside news on near-term prospects for global economy including positive PMIs.
  • US growth looking stronger: 0.7% in 2011 q4.
  • Even Euro area PMIs picked up in January, suggesting growth had not continued to weaken.

Money, credit, demand and output

  • UK GDP fell 0.2% in the last quarter of 2011, broadly in line with expectations.
  • Since then PMIs have improved sharply, though other surveys were weaker.
  • First quarter of 2012 may be a little stronger than previously expected.
  • Credit conditions for businesses and households remained tight, but bank funding markets improved since the end of the year which could lead to improvement.

Supply, costs and prices

  • CPI fell to 3.6% in January, as expected.
  • Employment rate broadly flat since November.
  • Pay growth remained subdued and expected to remain modest.
  • Little significant movement in medium-term inflation expectations.

GDP and inflation projections

  • Slight contraction in the final quarter of 2011 followed a period of sluggish growth.
  • Monthly indicators pointed to a pickup in output in January.
  • There are continued substantial uncertainties surrounding the outlook for growth, most significantly due to developments in the euro area.
  • Growth will be dependent on whether households start spending again (as real income squeeze abates); cost and availability of credit; impact of asset purchases on demand.
  • Likely path for inflation also highly uncertain, with several unknown factors such as the path of energy prices.

Key risks to inflation

  • On the upside:- companies' input costs rising further- disruptions to gas and oil supply- earnings growth outstripping slow productivity growth
  • On the downside:- growth too weak to absorb the pool of spare capacity- Euro area crisis increasing banks' funding costs and feeding through into the availability and cost of credit- Slower than expected growth in household spending

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