Bank of England Minutes Suggest No Rate Change in September, Either

August 20, 2008

Faced with the twin shocks of higher energy prices and tightening credit conditions, the Bank Rate has remained at 5.0% since April, down from a peak of 5.75% before December.  Both the July and August policy meetings ended with a 3-way split decision (seven voting for no rate change and one vote each for an increase of 25 basis points and an immediate cut of 25 basis points).  In one respect, the August minutes reveal a growing bias to ease further; officials observed that during the month since their meeting in July that “while the activity news had continued to worsen, the news on the near-term inflation outlook had been more mixed.”  Nonetheless, the August minutes did not repeat the assertion made in July that the rate decision had been “a difficult one,” and officials conceded that even with no immediate rate cut that “significant risks” of higher inflation would remain.

At the July meeting, “most members judged that the risks to inflation were most likely to be balanced by maintaining Bank Rate at 5.0%.”  The August minutes express greater confidence in the correctness of that decision, thus suggesting that a 5.0% rate will be maintained at the upcoming September meeting and indeed possibly throughout the fourth quarter.  The new minutes state that “Most members of the Committee judged that the current stance of monetary policy was broadly appropriate and that Bank Rate should be maintained at 5% this month.  Inflation was likely to move further above the target in the coming months.  The outlook for activity growth had continued to worsen, but some build up in the margin of spare capacity was likely to be necessary to ensure that inflation returned to the target (2.0%) in the medium term.”  Policy that is deemed appropriate in August cannot easily be changed one month later without a lot of explaining to do, and tellingly, the policy committee’s most dovish member, Blanchflower, was again the only person voting for a cut.  Market observers had thought he would have won at least one convert to his position.  Blanchflower, by the way, has wanted a more accommodative policy than the Committee majority at every monthly meeting so far this year, but only in March did any other committee member (that being Gieve) agree with him.



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