Nov 12: MPC Minutes

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The decision: Unanimous vote to maintain Bank rate at 0.5%. Eight members voted to pause asset purchases, one member preferred to increase the programme by £25 billion


1. Financial markets

- US and eurozone central bank actions had improved sentiment in markets over the month.

- Measures of UK bank funding costs had fallen.

- So far unclear whether improvement in global market conditions would filter through to the real economy via increased credit availability of spending

- International risks remain - resolution of eurozone crisis; US fiscal policy; Middle East tensions and rebalancing challenges in China.

2. Money, credit demand and output

- Underlying activity in the UK expected to be broadly flat over 2012; growth in q4 likely to be negligible but a contraction is possible.

- Bank lending growth has remained weak and it was too soon for an assessment of the FLS impact. 30 Banks are now participating in the scheme.

- Bank Agents report that reductions in institutions' marginal funding costs appear to be working through more quickly in the mortgage market compared with corporate lending. They also report tightening terms for SMEs and low awareness amongst this group of those lenders making offers at lower interest rates.

3. Supply, costs and prices

- The recent pick up in inflation was greater than expected at the time of the August Inflation Report; energy price increases were greater and had kicked in earlier than expected, tuition fee increases would also add to inflation over the next three years.

- Both energy prices and fees would add around one percentage point to CPI inflation bi mid-2013.

- Risks to the medium term inflation outlook were broadly balanced, but there were a number of uncertainties around, for example, movements in productivity.

4. The decision

There were two interesting points of debate around this month's policy decision - the impact of the asset purchase programme and the case for a further reduction in Bank Rate:

- On asset purchases: The Committee agreed that demand and output would have been a lot weaker without QE and that there was still scope for asset purchases to lower long-term yields on government and corporate debt and support other asset prices. The question however, is what difference this would make to the economy given the other factors weighing on demand and output. The Minutes state that asset purchases have not become a less effective policy tool, rather uncertainty and a desire to reduce leverage meant that real activity was less responsive to lower borrowing costs that normal. This situation was regarded as one that could easily reverse.

- On reducing Bank Rate: consultations had taken place with FSA and the Building Societies Association on the possible impact of this move. While it could benefit some existing borrowers, it was also likely to lead to a reduction in profitability for some lenders that could in turn lead them to respond by raising other loan rates or holding down lending. Taking FLS into account it was seen as unlikely that Bank Rate would be reduced further in the foreseeable future.


Chief Economist

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