MPC minutes – Feb 20

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The minutes of the MPC meeting on 6 and 7 February show MPC members voted to maintain the bank rate at 0.5 and hold the level of quantitative easing at £375 billion.

Key points:

Financial markets

  • Improved sentiment that has been showing through in financial asset prices since the summer has been sustained.
  • Accommodative policies of major central banks and the view that major downside risks had lessened improved prospects for a recovery in the global economy.
  • Most major equity indices were close to post-crisis highs with strong rises seen in the UK, US and Japan

International economy.

  • Overall there are few signs that improved sentiment is translating through into improved economic data.
  • The US experienced a small contraction in q4 GDP but other economic indicators provide a more positive picture of the health of the economy.
  • The Euro area contracted at the end of last year but the pace of contraction may be starting to ease.
  • A fiscal stimulus package has been confirmed in Japan along with further rounds of asset purchases.
  • China shows signs of returning to robust growth.

Money, credit, demand and output

  • GDP contracted in q4 2012 as global uncertainty depressed industrial production and UK exports.
  • Bank lending remained weak. Some signs that the FLS is having an impact and improvement has been seen in the housing market.
  • Lower spreads on bank loans and increased availability of credit have been seen for large corporations but this is not as evident for small businesses.
  • GDP is expected to remain weak in the near term with a slow but sustained recovery expected over the next three years as domestic credit conditions and the wider global economy improve.
  • GDP expected to remain below the pre-crisis level until 2015.

Supply, costs and prices

  • CPI inflation is expected to rise in the near term due to higher oil prices – which had risen 4% since the MPC's last meeting – and the Sterling's recent depreciation. Inflation may remain above the 2% target for the next two years.
  • Private sector pay growth is expected to be close to 2% in the coming year and surveys suggest employment growth may be moderating.
  • February's Inflation Report outlined the expectation that output would continue a gentle recovery and productivity would increase, lessening unit wage costs. There is a lot of uncertainty around this view relating to productivity and demand growth.

The decision

MPC members decided to hold both the bank rate and the stock of asset purchases at their previous rates. The decision regarding the bank rate was unanimous but three people did vote in favour of increasing the size of the asset purchase programme by a further £25 billion, including Governor Mervyn King. This was unexpected and has been seen as a bit of a turnaround given that he has previously questioned the value of further quantitative easing saying it will have little impact on growth.

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