As Lee highlighted in her recent blog, a marked shift in tone by the Bank of England Governor, Mark Carney, in last week's Mansion House speech has generated more debate about when the central bank is likely to begin to hike interest rates.
Mr Carney had previously pushed a consistently dovish message, regularly highlighting headwinds to the recovery such as subdued wage growth, weak productivity trends and estimates of ample spare capacity in the labour market as reasons why Bank Rate could remain at its historically low level. However, last Friday's speech—in which he stated that interest rates could rise sooner than markets were expecting (that is, before the end of this year)—was far more hawkish in tone. One possible theory for this change of heart was that the balance of opinion among the nine members of the Monetary Policy Committee (MPC) had shifted more clearly towards a tightening of monetary policy.
For now at least, this does not appear to be the case. The minutes published today of the June meeting of the MPC showed that all nine members once again voted to maintain the Bank Rate at 0.5%. And while the decision was said to be "more balanced" for some members, the overall tone of the minutes was less hawkish than many had expected following Mr Carney's recent comments. The report again emphasised the weak trend in wage growth and the downside risks to domestic inflation, and noted that "it would be necessary to see more evidence of slack being absorbed before an increase in Bank Rate would be warranted".
All in all, the view from the Bank remains fairly nuanced, no doubt in part reflecting the divergence of opinions among some members of the MPC. The June minutes suggest that the Bank is now in the process of trying to communicate to investors, businesses and households that a rise in Bank Rate before the end of 2014 is more likely than had seemed the case a few months ago, but is still by no means a done deal.
Here's an overview of the main economic developments and issues noted in the minutes.
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 June 5th.
- Weaker output in US and Eurozone in first quarter, but MPC judgement still that global expansion will be sustained.
- Markets had broadly expected announcement of rate cuts and lending boost from European Central Bank.
- US bounceback expected in Q2 after poor weather, but signs that housing market had weakened
- Chinese growth remained subdued. Q1 rise in activity in Japan ahead of April consumption tax rise.
- Modest rise in oil prices; decline in agricultural commodity prices.
- Low volatility in most asset markets, amid growing evidence of investors searching for yield.
- Global equity markets had strengthened. Robust demand for corporate and bank debt.
- Date at which the first rise in Bank Rate was fully priced into markets had moved forward slightly to Q1 2015.
- Sterling effective exchange rate had reached a post-crisis high during the month, but still broadly similar to level at time of May meeting.
- Business surveys continued to point to strong near-term UK growth. Bank forecasting 0.9% GDP growth in Q2, easing back slightly to 0.7% in Q3.
- Breakdown of Q1 GDP showed robust growth in household consumption and business investment, but sharp fall in government investment.
- Housing market activity appeared to have weakened since the start of the year.
- Reforms associated with the Mortgage Market Review (MMR) had probably played a role, but also signs of weaker housing supply.
- Indicators suggested robust consumption growth in Q2: strong retail sales and buoyant consumer sentiment.
Prices and costs
- Balance of companies surveyed by Bank's Agents had reported falling profit margins over past year, but margins expected to recover gradually.
- Inflation expectations remained subdued.
- Unemployment rate had edged lower and employment had continued to grow strongly.
- Wage growth remained subdued and surprisingly weak in last release.
- Survey data pointed to faster rises in pay than in official data.
- MPC expected wage growth to accelerate gradually as productivity improved and as slack was reduced.