The Indianpost

Bank of England’s hawks give up calls to raise interest rates

The Bank of England’s monetary policy committee voted unanimously to leave interest rates unchanged this month, with the two hawkish members of the committee abandoning their calls for borrowing costs to rise.

Spencer Dale, the Bank’s chief economist, and external policymaker Martin Weale fell back in line with the rest of the MPC and voted for interest rates to remain at their record low of 0.5%.

Minutes from August’s meeting, published on Wednesday, also revealed that the committee discussed a fresh round of quantitative easing – the radical recession-busting policy of creating electronic money.

The meeting at which Dale and Weale changed their minds took place against the background of wild swings on world stock markets. The crisis in the eurozone, disappointing GDP growth in the US, and Britain’s own domestic economic problems all persuaded the committee that inflation would drop back to its 2% target without a rise in rates.

“The slowing in world demand growth and the heightened tensions in financial markets meant that the balance of risks to the medium-term inflation outlook had clearly shifted to the downside,” the minutes explained.

The 9-0 vote in favour of leaving rates unchanged was the first unanimous decision on interest rate policy since May 2010 – the month before arch-hawk Andrew Sentance, who has now left the committee, began his calls for a rise.

The US economist Adam Posen was again alone in voting for the Bank’s quantitative easing programme to be increased by £50bn to £250bn. But at least two other members of the nine-strong committee considered whether a fresh round of asset purchases was needed, before deciding not to support Posen.

“Those members concluded that the case was not yet strong enough, particularly in light of the lower path for Bank rate now implied by financial markets. Further asset purchases might nonetheless become warranted were some of the downside risks to materialise.”

City analysts said the minutes cemented the impression given by governor Sir Mervyn King last week that borrowing costs would remain on hold for the foreseeable future, despite rising inflation, which hit 4.4% last month on the CPI measure targeted by the Bank.

Chris Crowe, of Barclays Capital, said he now expected the MPC to hold fire until August next year. Nida Ali, economic adviser to the Ernst & Young Item club, said the hawks had “thrown in the towel”. “The tone of the minutes was much more dovish than in recent months and more quantitative easing has gone from being a mere back-up option to being a genuine possibility in the near future,” Ali said.

The MPC gathered in Threadneedle Street to discuss monetary policy on 3 and 4 August. The vote came at the end of the two-day meeting, as a stock market rout drove the FTSE 100 index below 5500. The turmoil clearly dominated attention – with the minutes stating that “markets had been unsettled during the month, and had become particularly stressed in the days immediately preceding the committee’s meeting”.

Reports from the Bank’s regional agents, published with the minutes, confirmed that consumer demand remained weak, as households hit by high inflation counted the pennies.

“Discounting was often required to drive sales, with an increasing number of contacts reporting that promotions were now used almost year-round. Unexpectedly weak demand had generated an overhang of stocks, and in order to clear inventory, summer sales had begun earlier, and were expected to be deeper than usual.”

A week before the meeting, data had shown that the UK economy had grown by just 0.2% in the second quarter of 2011. The MPC predicted that underlying growth in the economy was probably stronger, but cautioned that it would remain “significantly below the level corresponding to a continuation of its pre-recession trend”.

King was forced to write an explanatory letter to the chancellor on Tuesday, as official figures showed that inflation remained more than 1% above the government’s 2% target for a seventh successive quarter. However, he made it clear that the Bank was now more concerned about the eurozone than the rate of inflation.

“Several [eurozone] member countries face substantial challenges in ensuring the sustainability of their fiscal positions and preserving the stability of their banking systems. There is a risk that this could lead to further severe stress and dislocation in financial markets and, were this risk to crystallise, it would have a significant impact on the UK economy,” he warned George Osborne.

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