Posted on July - 19 - 2010
PREVIEW: BoE July minutes
- Expected to show a vote of 7-1 to keep interest rates at 0.5%, with Sentance voting for a hike of 0.25bps
- Unanimous vote expected to keep the QE program unchanged at GBP200bln
Today’s minutes are unlikely to be too dissimilar from the previous month’s statement; however, this time round it is likely that the MPC would have paid more attention to the inflation level which remains stubbornly above the Banks’ mandated level of 2%. As such, given the recent comments from Sentance, most expect that he again voted to hike interest rates by 25bps to 0.75%. However, the majority of members will likely have argued that an interest rate hike is not warranted at this stage since such a move would pose a risk to an already fragile recovery. Separately, the vote to refrain from expanding the asset purchase facility (APF) is expected to have been a unanimous one.
Hawks vs. Doves…Doves win (for now)
In terms of Andrew Sentance he is expected to have voted again for a hike in interest rates by 25bps, citing inflationary pressures. The most recent report from the ONS showed that inflation has eased to 3.2% from 3.4%; however the core level rose to 3.1% from previous 2.9%, which marked the highest since records began in 1997.
During the last quarterly inflation report, the Bank of England projected that inflation is likely to fall below target in the next two years. Those projections were made on the assumption that the waning of base effects, as well as a high level of spare capacity would weigh on any potential price pressures stemming from the QE. In addition, the planned VAT rise is likely to place additional pressure on prices and at next month’s quarterly inflation report may prompt the Bank to reconsider the impact that spare capacity will have on the underlying trend in prices. Even though high inflation is not welcome by the Bank, it makes the government’s job at reducing the budget deficit easier. As such, even though the upward pressures will persist, an actual rate hike seems unlikely. Therefore the minutes will likely imply a higher than projected inflation rate but given the recent calamity in the markets, a rate hike would be unwarranted and may derail the fragile recovery.
The asset purchase facility was kept on hold in July, however the minutes will likely show that the MPC again refrained from making commitments on the program and instead stuck to the phrase that the program remains “under review”. The austerity measures which are shortly to be implemented by the new government are expected to severely reduce economic output, which indicates that further monetary easing may be required. As such, given extremely low rates, the feasible option left for the Bank would be to conduct more QE in the future if needed.
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