| Bank of England rates vote was unanimous |
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| Wednesday, 19 December 2007 | |
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Minutes of this month’s Monetary Policy Committee meeting show that the decision to reduce interest rates by 25 basis points to 5.5 per cent was taken unanimously.
The Monetary Policy Committee (MPC) was under a lot of pressure when it met on 5 and 6 December to discuss the base rate of interest. The markets were attaching around an 80 per cent probability to a 25 basis point cut at this meeting. In its November Inflation Report, the committee’s central projection had been for gross domestic product (GDP) growth to slow during the next year to below its long-run average. The projection had been based on market yields that implied a reduction in Bank Rate over the forecast period. Since the Report, survey data had indicated slowing UK output growth in the fourth quarter, broadly as expected. Impact of higher energy and food price inflation The MPC’s central projection had been for consumer price index (CPI) inflation to rise above the 2 per cent target during 2008, reflecting the impact of higher energy and food price inflation, and also the depreciation of sterling. CPI inflation had then been projected to ease back to target, as pressures on capacity moderated. The risks to growth had been judged to lie to the downside, but the risks to inflation had been balanced. In the United States and euro area, the United Kingdom’s largest trading partners, there appeared to be signs of softer growth. Emerging market economies continued to grow strongly, implying a further rebalancing of world growth. Financial market conditions had deteriorated further, with more evidence of credit risk being priced into some financial assets than there had been during August and September, when the concerns had been more obviously about liquidity risk. The MPC minutes show that there were increasing worries about the scale and location of banks’ losses, and the implications for banks’ capital positions. Inter-bank lending spreads had returned to levels seen in September. Tighening in credit conditions Evidence on the impact of financial market conditions on lending to the rest of the economy was still patchy. There were some clear signs of slowing in secured lending to households, and the Bank of England’s regional agents had reported evidence of a tightening in credit conditions faced by firms. Renewed financial market problems had increased the risk of a more severe reduction in the availability of credit. UK property markets had deteriorated. The slowdown in the housing market seemed more pronounced than expected and commercial property prices had fallen further. News on the month had also suggested that the short-run trade off between activity and inflation had worsened. Though oil prices had fallen back in recent days, they remained at very high levels by historical standards, and options prices continued to suggest greater upside risks than was the case a few months earlier. The sterling effective exchange rate index had declined further during the past month, and that would put more upward pressure on sterling import prices. Many price indicators in business surveys had risen. Measures of inflation expectations had risen further. Worsening financial market turmoil The committee discussed a number of policy options. Continued upward pressure on prices and costs in the near term and elevated inflation expectations suggested that no change in bank rate might be appropriate to keep inflation on track to meet the target. The worsening financial market turmoil, however, and the consequent tightening of credit conditions had increased the downside risks to activity and inflation in the medium term. Signs of slowing growth in the industrial world were already apparent. The MPC concluded that this suggested a substantial loosening in policy might be needed. It feared that a large reduction in interest rates would increase the risk of rising inflation. The committee thought that the downside risks to the economy and inflation in the medium term from the deterioration in financial market conditions outweighed the potential upside risks to inflation from short-run cost pressures. The level of interest rates, following a marked tightening in policy last year, was already restrictive, and the expected slowdown in domestic demand should act to dampen inflationary pressures. The committee decided that this put it in a good position to act pre-emptively to reduce the risks stemming from the tightening of credit without losing credibility among wage and price setters. “Against that background, the Committee judged that an immediate decrease in Bank Rate of 25 basis points was necessary to meet the inflation target in the medium term,” the minutes conclude. Related articles
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