CBA International Economics
- MPC minutes reveal 9‑0 vote to leave asset purchase target unchanged at GBP375b
- Some members still believe that more stimulus is required, but favour a “mixed strategy”, and prefer to wait for August report on forward guidance.
- We expect forward guidance to be announced following the August MPC meeting. Additional QE now looks very unlikely
MPC votes 9‑0 to leave asset purchase target unchanged at GBP375b.
The minutes from the July MPC meeting revealed an unexpected change in the voting pattern of the committee. Bank rate was left at 0.5% as expected on the back of a unanimous 9‑0 vote. The stock of asset purchases was also left unchanged at GBP375b. This was also a unanimous 9‑0 vote. The shift in the voting pattern from 6‑3 in June had not been expected and triggered an immediate GBP surge.
Speculation going into the minutes had been on how Governor Carney would vote in his first outing on the committee. In the event he was not in the dove‑ish camp calling for more QE. Nor for that matter were Mr. Miles and Mr. Fisher who both changed their votes at the July meeting, on the face of it, a relative hawkish shift.
MPC acknowledge improvement in economy and also threat to recovery from rising market interest rates
The text of the minutes indicated that the MPC are acknowledging the undoubted improvement in the economy over the past few months. Developments in the domestic economy had “generally been positive”, “activity surveys had continued to pick up”, and it “might well be the case that this momentum would continue into the second half of the year.”
However, the MPC are also monitoring the rise in international interest rates. The increase in interest rates over the past month “represented an unwelcome tightening in monetary conditions that, were it to persist, would risk hampering the emerging recovery.”
But still an underlying divide on the MPC
There is also plainly still a divergence of views on the MPC. For most members, the current monetary policy setting was appropriate and the onus on policy at this juncture “was to reinforce the recovery by ensuring that stimulus was not withdrawn prematurely.” The recent rise in market interest rates, were it to be maintained, “would represent such a premature withdrawal”, but the proposed post‑meeting statement from the MPC ought to help prevent such an outcome. For these majority of MPC members there is therefore no perceived need for further stimulus at the current juncture, assuming that market interest rates turn back lower.
However, the minutes reveal that for certain other MPC members further stimulus was still warranted in July. For these members, “The pace of recovery remains too slow to begin to close the economy’s margin of spare capacity” and there remain “significant headwinds to growth in the UK.” “An expansion of the asset purchase programme remains one means of injecting stimulus, but the Committee would be investigating other options during the month, and it was therefore not sensible to initiate an expansion at this meeting.” Moreover, “given the already large size of the asset purchase programme there was merit in pursuing a mixed strategy with regards to the different policy instrument s at the committee’s disposal.”
The comments suggest that the shift in stance on the committee is perhaps not quite as significant as indicated by the outright 9‑0 vote. This second group of MPC members still believes that more stimulus is needed, but are content to wait until the all‑important August MPC meeting and Inflation Report to make a judgement. “The Committee’s August response to the requirement in its remit to assess the merits of forward guidance and intermediate threshholds would shed light on both the quantum of additional stimulus required and the form it should take.”
Forward guidance the next step in terms of policy easing
The comments indicate that the preference amongst this group now appears to be for additional stimulus in the form of forward guidance rather than QE. This sentiment does not preclude additional QE in the future should economic conditions warrant more aggressive easing. However, the next step in terms of easing will almost certainly now be the implementation of forward guidance and not additional asset purchases.
Looking ahead to the August 1st MPC decision we therefore continue to expect the announcement of forward guidance in a post‑meeting official statement. Some combination of time‑based and perhaps economic state‑based guidance looks probable. The August Inflation Report forecasting round will be based on the new revised GDP estimates, ones which should indicate that there may be a little more spare capacity in the UK economy than previously assumed and commensurately less underlying inflation pressure. There was surprisingly little mention of the new GDP figures in the policy decision discussions other than to note that “a degree of slack was likely to persist for some time.“