MPC minutes emphasise lack of inflationary pressures

As anticipated by economists, the minutes of the 7 to 8 October meeting of the Monetary Policy Committee (MPC) revealed that the decision to maintain Bank Rate and the current size of the Bank’s bond purchase programme was taken by a majority of seven votes to two.

However, at first glance the details of the document seem to place a considerable emphasis on the lack of inflationary pressures to be seen and, in part as a result, on the risks inherent in a premature tightening of monetary policy.

Significantly, the minutes recalled how the projections contained in the August Inflation Report already only contemplated consumer prices reaching the BoE’s 2% target at the tail end of the three-year forecast horizon – despite the limited increase in Bank Rate implied by market rates.

Amongst some of the most relevant passages in the minutes were:

- A broad range of measures of inflation expectations was broadly in line with the inflation target and suggested little sign of future inflationary pressure.

- Unit labour costs, once certain transitory factors were stripped out, were broadly flat over the year to the second quarter and materially below the inflation target.

- Measures of ‘core’ inflation had remained stable at subdued rates.

- The fall in CPI to 1.2% in September would require “further analysis”.

- “Analysis by Bank staff suggested that the output gap, while continuing to fall, was estimated to be slightly larger in the second half of the year than had been previously expected.”

- “While it was appropriate for policy to look through the near-term effects of lower import prices on CPI inflation when indicators of cost and price pressures remained consistent with inflation returning to the target in the medium term, CPI inflation had fallen relative to an already weak outlook.”

All of the above came after financial markets have over the last three weeks pushed out the expected date of the first increase in Bank Rate to August 2015.

Reaction in sterling overdone

As expected the “broader tone” of today’s MPC minutes was more dovish, economists at Bank of America-Merrill Lynch told clients in a research note released early on Wednesday afternoon.

Nevertheless, they go on to say that the reaction in the sterling exchange rate is an over-reaction in their view, given that the outlook for policy had already been aggressively re-priced by markets

“Though dovish, the recent run of softer UK macro data, combined with dovish rhetoric from a number of MPC speakers, was already pushing the market into expecting a more downbeat assessment, not only of UK economic growth prospects, but also those in the global economy. As a result, the Minutes have done little to alter our near-term view on GBP and we would expect sterling to reverse some its immediate post-release losses.”

As of 09:56, and following the release of the minutes, cable was down 0.53% at 1.6028.