Wednesday June 18, 09:45 AM
BoE voted 8-1 to keep Bank Rate unchanged at 5.00 pct; considered rate hike
LONDON (Thomson Financial) - Rate-setters at the Bank of England considered lifting borrowing costs at its last meeting on June 5 but ongoing fears about the outlook for the UK economy stayed their hand.
The minutes to the meeting, published this morning, showed that eight of the nine members of the Monetary Policy Committee voted to keep Bank Rate unchanged at 5.00 percent, with arch-dove Danny Blanchflower pushing for a quarter point reduction given his mounting fears of a UK recession.
The eight members voting for unchanged rates did conclude that the risks to inflation in the medium term had moved to the upside over the preceding months, meaning that a greater degree of slack would be possible to ensure inflation returned to target.
'As a result, there was no case for a reduction in Bank Rate this month, although that position could change as information about the path of activity and inflation accumulated in the coming months,' they said.
And for some members, the minutes showed that the news had been sufficient to consider whether an immediate rise in Bank Rate was warranted as delay would only increase the eventual costs of bringing inflation back to target.
However, with inflation expectations remaining relatively well-anchored, wage growth moderate, ongoing credit constraints and the rise in the yield curve appear to have kept the more hawkish members in the 'hold' camp.
'Although some chance of an increase in Bank Rate over the next twelve months had been priced into the market, there was no immediate expectation of a change,' the minutes said.
'An unexpected increase in Bank Rate might be counter-productive by appearing to exaggerate the Committee's concerns about the medium-term prospects for inflation,' they added.
The MPC did concede that the latest inflation news suggested that the BoE had under-estimated how high CPI (NYSE: CPY - news) would rise over the coming year.
'Analysis of the April CPI release (where inflation hit 3.0 percent) and news on energy prices had suggested that the path of CPI inflation over the next year was likely to be higher than the central projection of the May Inflation Report and could reach a rate higher than had been recorded since the start of inflation targeting in 1992,' the minutes said.
The MPC was not armed with the May CPI release, released yesterday, which showed CPI rising 3.3 percent, more than a percentage point above the 2.0 percent target, which triggered an explanatory letter from BoE governor Mervyn King to Chancellor of the Exchequer Alistair Darling.
In his letter, King sounded a relatively dovish tone even though he warned that CPI inflation could rise above 4 percent this year. The governor appeared to hint that he will be backing unchanged rates for a few months at least to see if the current inflationary surge proves 'temporary', as he expects.
The minutes showed that the MPC (A050540.KQ - news) continued to have considerable uncertainties about the path of inflation in the near-term, which would depend on what happened to world prices for energy and food and in particular on what happens with domestic energy prices, none of which could be influenced by monetary policy.
They also stressed that a slowdown in activity was necessary to contain wage growth and ensure that inflation returns to target in the medium-term.
For Blanchflower though, the news on short-term inflation developments had been more than outweighed by the prospect of slowing activity growth and its ensuing impact on prices. He also noted that the UK was showing similarities with the start of the slowdown in the U.S., with falling hose prices likely to weigh on consumer spending by more than anticipated in the May Inflation Report.
'Although a recession in the United Kingdom was not the central projection, there was a small but growing risk of a very negative outcome that would cause inflation to undershoot the target in the medium-term,' the minutes quoted Blanchflower as saying.
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