Bank of England saw no need to rush, minutes show -UPDATE

By Alex Bueso

Date: Wednesday 25 Jan 2012

-Mixed signals on UK corporate bond market at end 2011.

-US consumer confidence indicators not corroborating strong outlook for growth.

-Significant contraction in activity may have occurred during the fourth quarter.

- Downbeat BCC survey on Q4 expectations in services and manufacturing.

- Little to alter the view that output was likely to be broadly flat over 2011 Q4 and 2012 Q1.

-Bank agents show some investment put on hold due to uncertainty.

-Business surveys had suggested involuntary stock-building in the third quarter.

-Hard to draw clear conclusions on bank lending from the latest Credit Conditions Survey.

-Risk of a tightening in credit conditions in the near term remains.

-Outlook is still for a fall in inflation to fall to target by end 2012.

-Speed and extent of the fall in inflation after Q1 less certain.


As expected the decision taken by the members of the Bank of England’s (BoE) monetary policy committee, on the past 12th of January, to maintain the current policy settings was taken by unanimity.

On that date the Bank opted to keep its key policy rate and the size of its asset repurchase programme unchanged at 0.5% and £275bn, respectively.

At first glance the minutes of the meeting seem to point to a central bank which saw significant risks to economic activity while there remained some doubts about the pace at which inflation would continue to converge with their target, in the near-term above all, although they did believe that it would do so.

Worth noting, even those members of the MPC who thought that further asset purchases were likely to be required thought that, “there was no compelling need to increase the scale of the programme of asset purchases before completing those already announced.”

In fact, "for other members", the minutes say, "the risks to inflation were more finely balanced and it was less clear that inflation would fall below the target in the medium term."

When looking ahead, and for the latter, "particular concerns included: the risk of price pressures from firms seeking to increase margins; and the fact that, even if wage growth were to remain subdued, wages might add to inflationary pressures if productivity growth were also weak.

Following the release of the minutes Simon Hayes, at Barclays Capital, is commenting to clients that, "The minutes of the January MPC meeting showed that the decision to hold policy was unanimous, as had been expected. However, they also indicated that the impetus behind further asset purchases may be less than had previously been thought.

In the November Inflation Report the MPC projected a large undershoot of the inflation target in the medium term. This was a clear sign that the committee believed a further sizable injection of monetary stimulus would be needed and was likely in February. There have since been some more positive signs in the activity data (...)

The decision in February therefore seems less clear-cut than it did previously (Barclays is forecasting a £50bn increase in the size of the Bank's asset purchase programme). We still expect more asset purchases to be announced - the MPC's central projection for inflation is unlikely to have changed very much - but the committee may act less aggressively than had previously been expected and there is every chance that additional asset purchases will not garner unanimous support."

AB

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