July MPC meeting – summary of minutes

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As Lee highlighted towards the end of her recent labour market blog, economic indicators continue to present a mixed message over the likely timing of the first interest rate rise by the Bank of England. Proponents of a rate hike in the coming months point to robust GDP data and strong employment growth, while those of a more dovish tone highlight the very weak trend in wages, subdued inflation and the slump in UK productivity.

The minutes published today of the July meeting of the MPC showed that all nine members once again voted to maintain the Bank Rate at 0.5%, as they had done in each of the previous 34 meetings.

The overall tone of the report was fairly neutral: on the one hand the Committee stated that "economic momentum was looking more assured" and it was likely that the degree of slack in the economy was being absorbed more rapidly than previously thought, but on the other hand members acknowledged that there was "little indication of inflationary pressures building" and that a "premature tightening in monetary policy might leave the economy vulnerable to shocks".

The report noted that MPC members "put different weights on each element of these interpretations", implying a degree of divergent opinion, although it is striking how collegial the voting has remained despite an intensifying policy debate. According to the minutes, "for some members the decision had become more balanced in the past few months than earlier in the year", but it is still difficult to detect any notable shift in bias in the MPC's stance. Financial markets continue to price in the first rate rise occurring in Q1 2015.

The decision

The minutes confirmed that all nine members of the MPC voted to maintain the Bank rate at 0.5% and the stock of purchased assets at £375 billion at the meeting on July 10th.

Here's an overview of the main economic developments and issues noted in the minutes.

Global Outlook

  • On balance, outlook for the global economy had weakened slightly over the month.
  • Another downward revision to US Q1 GDP meant that full-year growth forecasts would have to be lowered, despite ongoing positive trends in labour market data.
  • Survey data pointed to a weakening of activity in the euro zone going into the second half of 2014.
  • No significant developments in major emerging market economies, with data pointing to steady growth in China in Q2, against the backdrop of continuing banking sector risks.
  • Mixed developments in commodity markets, with agricultural prices falling as industrial metals prices rose. Despite geopolitical concerns, oil prices had traded in tight range around US$110 per barrel.

Financial markets

  • Noticeable increase in UK short-term interest rates and a further appreciation of sterling.
  • Some evidence of reduction in global risk appetite. Low levels of asset price volatility, amid continuing search for yield among investors.
  • Increase in Bank Rate to 0.75% was now fully priced into markets by Q1 2015.
  • Policy easing measures by ECB broadly expected, with little impact on bank funding costs.

Domestic market

  • Trend of UK activity growth at or slightly above longer-term trend had continued. Some indications that gradual slowing might occur in second half of 2014.
  • Business surveys continued to point to strong near-term UK growth, although export picture had weakened and signs of moderation in housing activity.
  • Generally positive picture in corporate sector. Improving credit conditions for larger companies and modest up-tick in bank lending to private firms. Expectations for recruitment and investment remained buoyant.
  • Outlook for household spending growth a little weaker.

Prices and costs

  • Rise in CPI inflation to 1.9% in June had exceeded Bank expectations.
  • Strong employment growth implied further disappointment in productivity.
  • Wage growth had remained surprisingly weak.
  • Recent job growth had been more heavily skewed towards lower skilled occupations.
  • Bank offered two possible explanations for contrasting wage and employment trends: first, that lag between labour market tightening and wage growth was longer than previously assumed; second, that effective labour supply had increased, increasing slack and restraining wages.


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