MPC minutes - additonal stimulus in due course?

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A bit more good news on the inflation front as CPI edged down again to 2.5% in August. But it's likely future path together with the underlying health of the UK economy and likely global developments are still far from certain.

This morning's MPC minutes highlight the range of possibilities for all these economic variables through the remainder of this year and the continuing dilemma facing policy makers.

Where does the Committee see inflation heading?

In short the answer is down, but not as quickly as the Committee had been expecting at the time of its August Inflation Report. Some commodity prices had been on the increase due to supply constraints and this, together with expected increases in utilities and food prices would be passed through to consumers later this year. However, there was still judged to be spare capacity in the economy which would continue to bear down on inflation in the medium term.

What about growth?

Here the picture is a lot less clear. The Jubilee impacts on GDP should be unwound in the third quarter and a boost from the Olympics should also bring a return to growth in the thiid quarter of this year. While some business surveys had picked up a little, measures of sentiment appear to be pretty weak. In addition, firms opting to retain or recruit rather than invest in new plant and machinery would indicate that many are reluctant to commit to increases in capacity in case the demand outlook deteriorates.

The big international questions remain firmly on the table - where does the eurozone go from here, how will the US navigate its budgetary tightening in 2013 and are emerging economies in for a more prolong period of sub-trend growth? Since the Committee met we've had more action from the ECB to purchase bonds of struggling countries, which markets reacted positively too, but eurozone politicians still have a mountain to climb in bring stability to the bloc.

A word on FLS

There was a fair amount of emphasis on the role of FLS in boosting borrowing by households and the corporate sector to support investment. The Committee noted some initial positive signs that it was feeding through to lower lending rates, but acknowledged that this was going to be a long game with banks using the full 18 month window to draw funding from FLS.

What's new for October?

The decision to proceed with asset purchases announced in July and keep rates at 0.5% was a unanimous one. But for some members:

additional stimulus was more likely than not to be needed in due course

It would, therefore, seem to be a question of when. The October meeting will see a bit more evidence on whether activity in the UK did indeed pick up in the third quarter as expected. However, there is unlikely to be a great deal more clarity on prospects for the external environment coming through in the next few weeks. With views that the risks to inflation remain balanced in the medium term, so it would seem the decision on what next for QE will be similarly balanced when the MPC meets again in October.


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