The minutes of the Monetary Policy Committees August meeting were published today, and in it the details of the Committee's discussion of voting and decisions regarding forward guidance. We already knew that they adopted some soft forward guidance. See this previous blog for further details on the nature of the forward guidance.
The minutes provide some further information about the reasoning behind the decisions and the alternatives that were considered by the Committee.
- Framing the guidance in terms of economic conditions was seen as more effective than specifying a time period for maintaining the stimulative monetary policy stance.
- The volatility, likelihood of revision and the need to spell out the development of potential supply outweighed the positive benefits of using real GDP.
- The more stable measure of the unemployment rate, which tends to move with spare capacity in the economy, was seen as a better indicator.
- There was some disagreement on the timing of the inflation knockout indicator, with one member strongly in favour of a shorter horizon for bringing inflation back to the 2% target.
This month Committee members voted on three decisions and the voting was largely, but not entirely, unanimous.
- Unanimous vote to keep the bank rate at 0.5%
- Unanimous vote to keep the stock of asset purchases at £375 billion.
- Unanimous support for the adoption of forward guidance, however, one member – Martin Weale – voted against the proposition on the view that the time horizon for the inflation knockout was too long.
As always, the MPC had a full discussion of economic conditions and developments. The key factors driving the MPC's decisions are summarised below.
Financial markets are less volatile…
- Statements and comments from central banks have partially driven down market expectations of changes to the official interest rates.
- The Sterling depreciated over the last month in line with the fall in interest rates.
…but international demand conditions have been mixed.
- News from the Euro-area has been better than expected, with consumer confidence picking up, credit conditions stabilising, and survey indicators rising to their highest level for over a year.
- But the slowdown in emerging markets seems to be more protracted. In China, progress towards rebalancing has been very slow and quarterly growth has steadily declined. Other emerging markets are facing the combined challenges of slower growth, high inflation and capital being taken out of the country.
- The US recovery is proceeding as expected and consumer spending has improved.
- Weaker commodity prices are, in part, mitigating the slowdown in emerging economies.
Movements in the domestic economy have been largely positive…
- On the domestic front, nearly all indicators are looking up, providing the most positive set of data for the UK seen for some time.
- GDP grew strongly, with broad-based improvement across many sectors, and may be reflecting higher business confidence and lower credit conditions which may see business investment embark on its long-awaited recovery.
- Survey indicators have continued to improve.
- Improved consumption, consumer confidence and retail sales all point to households playing a stronger supporting role in growth. Housing market activity is showing some modest increases.
…though inflation looks set to remain above target for the next year or two.
- CPI inflation was 2.9% in June, slightly lower than the Committee was expecting due to lower than expected airfares and seasonal food prices.
- Pay growth has been volatile and below the average of the past three years.
- Employment has remained robust. ILO unemployment remained at 7.8% in the three months to June.