September MPC minutes

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Two weeks ago the Monetary Policy Committee (MPC) voted to maintain both the Bank Rate at 0.5% and the stock of asset purchases at £375 billion. They also agreed to reinvest £1.99 billion of cash flows in light of the Committee's forward guidance.

Today's minutes ae the first that have been issued since the Committee provided guidance on the future path of monetary policy. Let's look at the factors the MPC took into account when they made their decisions this month and, particularly, how the Committee perceived the market to be responding to the newly issued forward guidance.

More signs of a recovery in the domestic economy

  • GDP growth in 2013q2 was revised up to 0.7% and expansion was fairly broadly based across the economy.
  • Investment and export growth was stronger than expected.
  • Consumer spending, business confidence and housing market activity were up. The composite PMI for the UK reached its highest level since 1997.
  • BoE staff now estimate growth in q3 to be higher than the August Inflation report at 0.7% and early indications suggest we may see further strengthening in q4.
  • At the time, the unemployment rate had been stable at 7.8% and, while this has since fallen to 7.7%, still remains some way above the 7% threshold outlined in the forward guidance. Pay growth had been steady and is expected to remain around the 1% mark for the rest of 2013.
  • Inflation yesterday fell to 2.7% but the Committee expects the overall outlook for inflation to remain as expected with inflation hitting the 2% target in the medium-term.

And financial markets have seen substantial movement

  • There have been upward movements in Sterling market interest rates over the month and the Sterling appreciated to its highest level since mid-January.
  • Three reasons were given for the movements in asset prices, including
    • Speculation that the Fed would announce some tapering of US quantitative easing – many commentators believe this will be announced today.
    • The strength of the UK economic data over the past couple of months.
    • The nature of the announced forward guidance compared with market expectations. The conditions outlined in the forward guidance may have been more stringent than expected by the financial market.

But the international picture remains mixed

  • Euro-area: saw a return to positive growth in 2013q2 and the increase in output was relatively broad-based. But risks remain considerable.
  • US: Much of the commentary on the US has been around potential tapering of asset purchases. GDP was revised up in 2013q2 and expectations remain that the economy will grow 0.5% a quarter in the second half of the year.
  • Emerging markets: There is more concern about emerging economies where news has been less positive. Capital outflows have continued and some countries have instituted policy responses. Volatility in the mid-east is likely impacting the oil price.

The Committee added a qualifier on forward guidance

  • The MPC felt that they need to emphasise that the unemployment rate threshold was not an automatic trigger to change monetary policy, rather it would cause the Committee to reassess its stance.


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