MPC minutes - the vote the same, but the tone more dovish

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No change once again from the MPC. And although dissenting voices remain on the committee, this month’s minutes took a more dovish tone than we saw in September.

  • The MPC voted 7-2 to hold the base rate at 0.5%. The two dissenters, Martin Weale and Ian McCafferty, voted to raise rates by 25bps. 
  • The MPC voted to maintain the current stock of purchased assets.

What happened in financial markets?

The MPC noted that financial markets looked weaker at the start of October, as a result of the softer global economic outlook, and continued geo-political risks. (The meeting happened before the markets had a bit of a wobble on the 15th and asset prices have started to rise again since then).

Short term interest rates had increased a little in the US, while – in contrast – the ECB took action to ease monetary policy further. The divergent paths have been reflected in foreign exchange markets.

Sterling took a dip ahead of the Scottish referendum, but ended the month on a slightly higher note.

What happened in the international economy?

News was generally on the downside: continued weakness in the Euro area, with particular loss of momentum in Germany; slower growth in Chinese industrial production; and tighter monetary policy reigning in growth in other emerging markets. The US bucked the trend with more positive data on output and employment, although productivity growth appears to have slowed which may imply softer growth rates going forwards.

What happened in the UK?

Up until the middle of the year growth in the UK was slightly above its long term average, though indicators point to a slower second half, particularly as a result of slowing export orders.

Blue Book revisions showed that investment had been higher than previously thought: good news for the productive capacity of the economy, though it also suggests there is less room for ‘catch up’ spending in this area. The minutes note that this may have increased the downside risks to the business investment forecast.

CPI inflation had fallen considerably, to 1.2% in September, though real earnings growth remained elusive with annual growth in whole-economy total pay coming in at 0.6% in the three months to July.

And the outlook for rates?

As the minutes note, markets are now pricing in a rate rise later in 2015; the minutes state that “the date at which a 25bps increase in Bank Rate was fully priced into overnight index swap (OIS) rates had shifted out by around two months to July 2015”.

Indeed, there are plenty of reasons to think inflation will remain low for a while longer, and with global economic growth fragile at best, the MPC seems keen to hold off on a rate rise that might push the economy off course.

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