The latest minutes from the Bank of England Monetary Policy Committee (MPC) meeting on 9th and 10th of May 2012 have been published, providing an insight into their current thinking.
Looking at the financial markets, the improvement in investor sentiment that had been a feature of the markets in the first quarter had waned, introducing a sense of caution from investors. Concerns about the eurozone economies had intensified following election results in France and Greece.
The movement of government bond yields indicated a ‘flight to safety’, with historic lows on ten-year government bond yields in the UK and Germany. The equivalent yields had risen in Italy and Spain, reflecting investor nervousness about the security of this debt.
The Committee noted a further appreciation in the value of sterling. It had risen by 2% since their previous meeting in April and was 8% higher than its low point in the middle of last year.
They noted that sterling remained around 20% lower that its value five years earlier, but a continuing appreciation could have an impact on growth and inflation in the UK.
Looking overseas, the notes about the Chinese economy are particularly interesting.
GDP growth in China had slowed to 1.8% in the first quarter of the year. A fall in their current account surplus of over 10% of GDP in 2007 to a little under 3% in GDP in 2011 was explained with reference to a decline in China’s price competitiveness over this period, with an appreciation of its real exchange rate.
Global oil prices had fallen significantly between the April and May MPC meetings. Brent crude oil had fallen by 8% in dollar terms, with stronger production and reduced supply risks contributing to this fall in value.
Looking at the UK economy, the Bank commented on the estimated 0.2% fall in GDP in the first quarter, resulting in a return to recession. Other surveys suggested a somewhat stronger activity in the first quarter, leading to hopes that the initial ONS estimate could be revised upwards.
Considering the economic outlook for the second quarter, the MPC noted that lost output would occur due to the extra Bank Holiday in June. They believe underlying economic growth in the second quarter will be positive but subdued.
Turning to employment, the MPC noted that private sector employment had increased by 450,000 since the middle of 2010. Public sector employment had fallen by 350,000 during that time. Assuming this pattern can be continued, it should result in a more productive economy in the UK, with a bigger shift from public to private sector employment over time following the planned public spending cuts.
The minutes make several references to the eurozone sovereign debt crisis, with the possibility of a ‘disorderly adjustment’ continuing to weigh on UK activity for some time, even if such outcomes did not actually occur. The fear of eurozone collapse is likely to hold back the UK economy regardless of whether this actually happens.
Leaving aside the risks from Europe, as these could not be quantified in terms of size and likelihood, the case was made for further QE. For most members, there was not a sufficient reason to extend QE on this occasion, but we believe a more aggressive loosening of policy is likely to occur in the near term.
There was a unanimous vote on holding the Bank Rate at the record low of 0.5% and eight of the nine members voted to maintain the size of the asset purchase programme at £325bn.
Photo credit: Flickr/Bank of England
