May MPC meeting – summary of minutes

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It may still be some time before the economy actually sees a rise in official interest rates, but there are growing signs that sentiment in the central bank is beginning to shift. More than five years after the Bank of England (BoE) cut its policy rate to a historic 315-year low of 0.5%, the minutes published today of the May meeting of the Monetary Policy Committee (MPC) continued to present a dovish tone, but also hinted that debate is likely to become more intense over the coming months.

The decision

The minutes confirmed that all nine MPC members voted to maintain Bank Rate at 0.5% and the stock of purchased assets at £375 billion at the meeting on May 8th.

The emerging story behind the decision

According to the minutes, the central view of the MPC was that the margin of spare capacity in the UK economy remained in the region of 1-1.5% of GDP, that inflationary pressures remained subdued, and that the date at which financial markets were pricing in the first rise in Bank Rate remained around the spring of 2015. The key question, however, is how long is this consensus view likely to last, given the steady stream of robust economic data (the latest of which signalled buoyant retail sales and mortgage lending in April), still weak productivity trends and concerns over rapidly rising house prices in parts of the economy.

There were some clear hints in today's report of diverging opinions within the MPC. The minutes explicitly note "a variety of views on the appropriate path of monetary policy", while also stating that "It could be argued that the more gradual the intended rise in Bank Rate, the earlier it might be necessary to start tightening policy".

These specific references are the most hawkish that have appeared in the MPC minutes for some time, and contrast with the more downbeat tone adopted by the BoE governor, Mark Carney, who has been keen to stress the continuing signs of slack in the labour market and the fact that UK output is only now returning to pre-crisis levels.

That said, it is impossible to read too much into the implications of the MPC's current musings, given that the rate-setting Committee is about to welcome three new members over the next few months. So far there are few clues about how the newcomers are likely to vote.

Overview of the May minutes

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

Global Outlook

  • Recent data had been mixed, but MPC's expectation of sustained global expansion was broadly unchanged.
  • Unexpected weakness of US GDP in Q1, but rebound expected in Q2 after poor weather and one-off factors.
  • Indicators continued to point to declining momentum in China, amid banking-sector risks.
  • Modest strengthening of activity in the Eurozone, but still a long way to go in adjustment process. Further monetary stimulus from ECB was likely.
  • Commodity prices remained sensitive to political uncertainty in Ukraine.

Financial markets

  • Asset price volatility was relatively low, but likely to increase as advanced economies return to more normal policy settings.
  • Further rise in sterling effective exchange rate, supported by domestic demand growth.

Domestic market

  • Business surveys pointed to strong near-term growth. BoE currently forecasting 0.9% GDP growth in Q2.
  • Central view that growth would ease a little as pent-up demand faded, but remain relatively steady.
  • Credit Conditions Survey indicated improving spreads and availability of lending, but bank lending to companies weaker than expected in Q1.
  • Slight softening in mortgage lending data, but conditions for continued momentum in house prices remained in place, especially in London.
  • BoE Agents noted growing concerns over a shortage of properties for sale, which "might be due to prospective sellers holding out until prices rose further".
  • Reforms associated with the Mortgage Market Review (MMR) had recently come into force. Too soon to draw conclusions about medium-term impact.

Prices and costs

  • Unemployment rate had fallen below the 7% threshold set out in the MPC's guidance in August 2013, triggering the next phase of forward guidance.
  • Tentative signs of a slight pick-up in nominal wage growth.
  • MPC expected wage growth to accelerate gradually as productivity improved and as slack was reduced.
  • But still considerable uncertainty around the timing and extent of any strengthening.
  • Outlook for inflation little changed, with CPI rate projected to be close to 2% target in two to three years' time.

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