Minutes Of The Monetary Policy Committee Meeting Held On 9 And 10 ...
Publication date: 23 September 2009
MINUTES OF THE
MONETARY POLICY
COMMITTEE MEETING
9 AND 10 SEPTEMBER 2009
These are the minutes of the Monetary Policy Committee meeting held on
9 and 10 September 2009.
They are also available on the Internet
http://www.bankofengland.co.uk/publications/minutes/mpc/pdf/2009/mpc0909.pdf
The Bank of England Act 1998 gives the Bank of England operational responsibility
for setting interest rates to meet the Government’s inflation target. Operational
decisions are taken by the Bank’s Monetary Policy Committee. The Committee meets
on a regular monthly basis and minutes of its meetings are released on the
Wednesday of the second week after the meeting takes place. Accordingly, the
minutes of the Committee meeting to be held on 7 and 8 October will be published on
21 October 2009.
MINUTES OF THE MONETARY POLICY COMMITTEE MEETING HELD
ON 9 AND 10 SEPTEMBER 2009
1
Before turning to its immediate policy decision, the Committee discussed financial market
developments; the international economy; money, credit, demand and output; and costs and prices.
Financial markets
2
Short-term interest rate expectations had fallen in most major economies during the month.
Compared with a month earlier, official policy rates were expected to remain low for longer. These
moves appeared to have been prompted by announcements and comments from the monetary
authorities. In the United Kingdom, the decision to extend the asset purchase programme, the
publication of the Inflation Report and the MPC Minutes had all led to a lower and flatter short-term
yield curve.
3
The announcement to increase the asset purchase programme by £50 billion to £175 billion at the
beginning of August had not been widely expected. That had led to a fall in the yields on gilts eligible
for the asset purchase programme by some 10-20 basis points on the day. Yields had continued to fall
during the month. Government bond yields had also fallen in the United States during the month, and
it was a more mixed picture across maturities in the euro zone.
4
The price of riskier financial assets had continued to rise, although trading volumes had been
light during the holiday period. Equity prices in the United Kingdom and the euro area had risen. In
the United Kingdom they had been boosted in part by the falls in gilt yields. Otherwise the movement
in equity prices over the month appeared to be associated with: higher earnings forecasts; more
positive macroeconomic outturns, particularly in the euro area; and a perception among market
participants that the worst near-term downside risks to activity had decreased further.
2
5
Corporate bond yields had fallen further in sterling, dollar and euro markets. Measures of
liquidity in the sterling corporate bond market had continued to improve, and issuance so far in
2009 Q3 had remained robust.
6
Libor rates had declined further: three-month Libor was below 1% in sterling, dollar and euro
markets. Sterling Libor-OIS spreads had narrowed more quickly over the past six months than their
dollar and euro counterparts. At around 30 basis points, the sterling Libor-OIS spread was close to
levels last seen in January 2008. Nevertheless, the volume of trading in the interbank market had
remained low. Libor was important not just as a measure of banks’ funding costs, but because many
loans to non-financial companies were priced off Libor, and these developments could reduce the cost
of borrowing.
7
Sterling had fallen by around 3% during the previous month. That downward move had been
broadly based against the dollar, euro and yen. The relative fall in sterling interest rates could perhaps
explain some of the fall.
The international economy
8
The economic recovery had continued to gather pace in emerging markets, particularly in Asia.
These economies would represent an increasingly important influence on the UK trade and growth
outlook in future. China was in a strong position to sustain a rapid expansion. It had a low level of
public debt, its banking sector had not been directly affected by the financial crisis, and supply
capacity was likely to grow quickly. But if China continued to follow a development strategy based on
export-led growth that would not help to solve the global economic imbalances and would reduce the
probability of a sustained recovery in the world economy.
9
Recent months had seen a steady improvement in business survey indicators across the globe
more generally, and that trend had continued this month. The JPMorgan Global Purchasing Managers
Indices (PMIs) had increased further in August and were above the levels that prevailed just before the
collapse of Lehman Brothers. The global manufacturing PMI was consistent with expanding output in
manufacturing, and for services it was close to the level that was consistent with no change in
economic activity.
3
10
Recent official data for 2009 Q2, although not as timely, indicated that a sharper recovery in
some countries may be underway than the PMIs had suggested. That was especially true for the
United Kingdom’s main trading partner, the euro area. Euro-area GDP was estimated to have fallen by
0.1% in 2009 Q2, which was markedly stronger than the sizeable contraction that the PMIs suggested
had occurred. Indeed, France and Germany had even expanded in the second quarter, according to
these official data. It was difficult to judge how much weight to place on the official data relative to
the surveys for the euro area at this stage.
11
In the United States there were further signs that the economy was pulling out of recession. But,
as in the euro area, consumption had been boosted by the introduction of a vehicle scrappage scheme.
And to the extent that these schemes had caused households to bring forward car purchases,
consumption was likely to fall back once they ended. There was, therefore, some concern about the
sustainability of the recovery in a number of countries.
12
Most of the major advanced economies had reported a positive contribution from net trade in
2009 Q2. Emerging market and developing economies – especially in Asia – could be at least partially
responsible. But according to the available partial data, the change in the trade balances of developing
economies did not appear large enough to account for movements in the developed economies trade
data. Future data releases should shed more light on this issue.
Money, credit, demand and output
13
M4 growth, excluding the money holdings of institutions that intermediate between banks, had
been estimated to have picked up slightly to 5.3% on a three-month annualised basis in July compared
with 4% in June. The annual growth rate of non-financial corporate money holdings had become
positive for the first time in over a year. That was encouraging, as one way the asset purchase
programme had been expected to stimulate nominal spending was through boosting the money
holdings of the non-financial private sector.
14
In contrast, bank credit to the private non-financial economy had contracted in July. There had
been a small net repayment of credit by households – the first since the current version of the data
began in 1993. And there had been further striking falls in non-financial corporate bank credit. Weak
4
credit demand was likely to have been a factor, but so too was restricted supply. The pressures on
banks to shrink their balance sheets had continued to impose monetary restraint on the economy.
15
The contraction in GDP in Q2 had been revised to 0.7% from 0.8% in this month’s ONS release.
Since that release, the combination of new construction and industrial production data for Q2
suggested that GDP may be revised further in the same direction.
16
The latest data had provided an early guide to developments in Q3. The Index of Production for
July and the survey data for August were consistent with output having stabilised in the middle of this
year and suggested that growth in the second half of this year was likely to be positive.
17
Although this was a promising sign, these data had to be set in context. Over the past year,
output had contracted by over 5%. The prospects for final domestic demand would be an important
determinant of the sustainability of the recovery. According to initial estimates, private final domestic
demand had continued to fall sharply in Q2. Within that, business investment was estimated to have
declined by over 10% in Q2, a larger fall than had been implied by surveys of intentions. First
estimates of business investment were typically revised. Nevertheless, falls of that size were rare in
the series’ history.
18
Consumption was estimated to have contracted by 0.9% in Q2, quite a bit weaker than the
Committee had expected at the time of the August Inflation Report forecast. Indeed a theme of
Committee discussions in recent months had been that household spending was holding up better than
it might have done, given the economic backdrop. That assessment had been based on the signals
from both retail sales and from vehicle registrations. Retail sales were estimated to have grown by 1%
in Q2 and the most recent indicators pointed to a similar rate of growth in Q3. Private new car
registrations had also bounced back strongly in recent months, boosted as in other countries by a car
scrappage scheme.
19
It was possible that the consumption data for Q2 would be revised. The ONS had less than half
of its final source data available, when producing that first estimate. Moreover, some of the
unexpected weakness had been concentrated in the consumption of non-profit institutions serving
households, which could prove to be erratic. Nevertheless, the weak data did suggest that the
5
Committee should perhaps be cautious in drawing inferences about consumption from strong retail
sales and car registrations.
20
Dwellings investment had been broadly flat in 2009 Q2 after two years of substantial falls – the
level of dwellings investment was estimated to be around 30% below its 2007 peak. The housing
market had continued to show further signs of recovery during August. House prices were estimated
to have increased again: an average of the Nationwide and Halifax indices suggested that house prices
were up almost 5% from their April trough. Mortgage approvals for house purchase had also
increased further in July.
21
GDP growth had received positive support from stockbuilding, net trade and government
spending in the second quarter. The contribution from stockbuilding had been slightly stronger than
the Committee had expected. Nevertheless, the ONS data suggested that firms had still run down their
stocks in Q2, only less aggressively than in the previous quarter. That meant there was still scope for
inventories to continue to add to growth over the next few quarters, as the stock cycle ran its course.
As in other developed economies, net trade had made a positive contribution to growth as imports fell
sharply.
Costs and prices
22
CPI inflation had been 1.8% in July. In line with the pre-release arrangements, an advance
estimate for CPI inflation of 1.6% in August had been provided to the Governor ahead of publication.
Inflation in these months had been higher than the August Inflation Report central projection had
implied. There was no breakdown yet available of the August numbers, but CPI inflation excluding
the contributions of food and energy prices had remained stubbornly high over a number of months,
despite the large degree of economic slack that the Committee believed had opened up in the economy.
One possible explanation was that the past depreciation of sterling was continuing to have a more
persistent impact than previously thought.
23
There were two further potential explanations as to why CPI inflation was not falling more
rapidly. The Committee might have misjudged the amount of economic slack in the economy. The
financial crisis could have had a more damaging effect on the supply-side of the economy than the
Committee had assessed. But this would still leave a very large amount of slack, which would put
6
downward pressure on prices in the medium term. An alternative explanation was that the margin of
spare capacity was in line with the Committee’s assessment, but that it was having less of a depressing
effect on inflation than the Committee had expected. That might have reflected the fact that inflation
expectations were reasonably well anchored to the 2% CPI inflation target, and that they were having a
greater stabilising influence on actual inflation than the Committee had anticipated. It was impossible
to distinguish between these two explanations with the current data, yet they had different implications
for policy. A smaller amount of spare capacity than the Committee judged likely implied that
monetary policy needed to be less stimulative, other things being equal. But the well anchored
inflation expectations explanation implied little change to the policy outlook: policy still had to be
sufficiently accommodative to close the output gap over a reasonable time frame, otherwise inflation
would eventually fall well below the target.
24
In the August Inflation Report, the Committee had judged that inflation would probably be
unusually volatile in the coming months and that it had been more likely than not that inflation would
temporarily fall below 1% in the autumn. But part of the sharp fall in inflation expected over the next
few months had been based on the assumption that there would be further cuts in utility prices in the
autumn. This now appeared unlikely. Taken together with the outturns for July and August, this
meant that the probability of inflation falling below 1% in the coming months had declined since the
August Inflation Report. Nevertheless, it was still the case that, in the near term, CPI inflation was
likely to be extremely volatile. It would probably fall again in September. But thereafter it could rise
sharply, reflecting past changes in prices dropping out of the twelve-month comparison, the reversal of
the reduction in VAT, and other tax changes. That sharp rise was likely to be temporary and so would
have little implication for policy unless it was accompanied by some news about the medium-term
outlook for inflation.
25
The prospects for earnings growth would have an important bearing on whether the inflation
target would be met in the medium term. Whole economy average earnings growth had remained
weak. In the three months to June, the average earnings index had been 2.5% higher than in the same
period a year earlier. Average earnings growth excluding bonuses over the same period had been
2.5%. That weakness could partly have reflected a reaction to the sterling exchange rate depreciation.
Employers facing rising import costs could have pushed down on wages. If sterling did not depreciate
further then wage growth could pick up, once the adjustment to the higher level of import prices had
been completed. Low wage growth could also have been a reaction to the economic slowdown. It was
7
possible that as the economy recovered wage growth would rise. But it was also possible that a high
and rising rate of unemployment would keep wage growth too low to be consistent with meeting the
inflation target.
The immediate policy decision
26
The outlook for the medium term described in the Bank’s August Inflation Report had not
changed markedly.
27
There had been a number of developments during the month with positive implications for the
short term. The world economic data had generally been stronger than the Committee had expected at
the time of the August Report. In the United Kingdom, the GDP data for 2009 Q2 had been revised
upwards. The more recent data on construction and industrial production had suggested further
upward revisions to the Q2 GDP data were likely, and manufacturing output had grown strongly in
July. Business surveys had continued to improve. Broad money growth had picked up.
28
Asset prices had continued to rise. The recovery in equity and house prices meant that collateral
values had risen, which should, other things equal, increase the availability of credit and reduce the
cost of borrowing. Market expectations of future Bank Rate had fallen; the exchange rate had
depreciated; and gilt yields were down. Three-month Libor had fallen to its lowest rate since the mid
1980s, and that rate was an important benchmark for the cost of companies’ borrowing. All of these
financial market developments were likely to boost nominal spending in due course.
29
The near-term downside risks to economic activity had lessened during the month. And there
was a possibility that the recovery in asset prices and confidence could mark the start of a virtuous
upward spiral for the economy. In addition to these positive developments in activity and asset
markets, inflation would probably be higher in the short-term than the Committee had thought a month
ago, though it was still likely to be extremely volatile.
30
But these short-term developments had limited implications for the medium-term inflation
outlook. Although the data on output growth were more encouraging, the level of output had fallen
significantly and there was likely still a large measure of spare capacity in the economy. Moreover,
even if GDP growth had turned positive in Q3, it was unlikely to have reached the point where the
8
level of spare capacity was shrinking. Unemployment continued to rise, and was likely to continue
increasing for some time. Growth in private final domestic demand, which was essential for a
sustained recovery, had been weaker in 2009 Q2 than the MPC had expected at the time of the August
Inflation Report.
31
There had been some promising indications from asset markets. But the lesson from previous
financial crises was that they were not resolved quickly, and that there could be false dawns. The
banking system still had to complete a process of balance sheet adjustment, including raising new
capital, and bank lending remained weak. The drag on aggregate demand growth from the financial
sector was likely to be long-lasting. High levels of public debt internationally and the persistence of
global imbalances remained downside risks to the sustainability of the recovery. The implications of
the financial crisis for potential growth and the degree of economic slack – and thus medium-term
inflation – also remained uncertain.
32
In August, the Committee had decided on and announced a programme of asset purchases for the
three months up to the November MPC meeting. The medium-term outlook had not changed
markedly since then. For those members who had preferred a larger stimulus at the August meeting, a
larger asset purchase programme could still be justified. But in the absence of significant news about
the medium term the case for adjusting the programme now was outweighed by the benefits of
following through with the programme of asset purchases announced in August. All members
therefore agreed to continue with the announced programme of asset purchases this month.
33
The Governor invited the Committee to vote on the proposition that:
Bank Rate should be maintained at 0.5%;
The Bank of England should continue with the programme, as announced following its
6 August meeting, of asset purchases totalling £175 billion financed by the creation of central
bank reserves.
The Committee voted unanimously in favour of the proposition.
9
34
The following members of the Committee were present:
Mervyn King, Governor
Charles Bean, Deputy Governor responsible for monetary policy
Paul Tucker, Deputy Governor responsible for financial stability
Kate Barker
Spencer Dale
Paul Fisher
David Miles
Adam Posen
Andrew Sentance
Dave Ramsden was present as the Treasury representative.
