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BoE MPC members grew more divided in their views, minutes showed

Date: Wednesday 19 Nov 2014

BoE MPC members grew more divided in their views, minutes showed

Several conflicting short-term trends seem to have muddied the Bank of England Monetary Policy Committee's crystal ball a tad, the minutes of the 6 November rate setting meeting revealed.
Although, based on current market interest rates, the economy will continue to grow at about its average historical pace over the coming years and inflation will return to target in three years' time, policymakers have grown more divided on their assessment of the risks involved, the minutes revealed.

That was very much in keeping with the tone adopted by Governor Mark Carney at his press conference, following the presentation of the Bank of England's November Inflation Report.

In particular, initial market commentary in the wake of the release of the minutes seemed to latch onto the following phrase, "Individual members ascribed materially different probabilities to these [upside and downside] risks [for growth and inflation]." There was also a "material spread" in the views on the balance of risks to the outlook.

Labour market dynamics may still hold the key

In particular, the very short-term outlook for policy rates seems to hinge on how the labour market's dynamics play out in the very short-term. Will the rate of unemployment continue to drop precipitously and stoke wage inflation or will productivity begin to slowly increase, slowing companies' need for further hiring, dampening the pressure on salaries and hence prices in the economy?

The two policymakers who dissented at the meeting, Ian McCafferty and Martin Weale, would seem to be those who see the risks as skewed towards the former scenario.

As the minutes point out, the most recent data available for the unemployment rate revealed the largest annual fall in unemployment since comparable data had become available in 1972. Likewise, in seasonally adjusted terms private sector pay had accelerated to an annualised rate of growth of 2.4% in the three months to August, although the pick-up was in-line with the projections contained in the August Report.

Medium-term risks to growth

It's worth noting that the committee pointed out the extent to which private domestic demand can sustain growth was "a key question".

Private sector savings were expected to keep the economic expansion going, via growth in consumption and investment, until household income growth, in particular, recovered. In parallel, the above meant that in the meantime the country's external position, as measured by the current account deficit, should be monitored.

Compensating for that to a degree however, the UK's net international investment position at market value had remained strongly positive, according to estimates from the Bank's staff.

What does all of this mean?

So, as Governor Carney said during his press conference, and as the minutes reiterated, "the Committee's guidance [for gradual and limited rate rises] on the likely pace and extent of interest rate rises was an expectation, not a promise."

In layman's terms, 'we make no hard promises, one way or another'.

Ironically, to different degrees both camps on the MPC will probably be eventually vindicated.


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