BOE Minutes Show Another Month Of 7-2 Split Of Monetary Decision

The BOE minutes for the September meeting showed a 7-2 vote to keep the Bank rate unchanged at 0.5% and the asset purchase program at 375B pound. Same as the August meeting, Martin Weale and Ian McCafferty dissented the policy decision and voted for a +25-bps hike to 0.75%. The staff revised higher their forecast for 3Q14 growth to +0.9%, whilst noting downside risks in 4Q14. The central bank only touched the September 18 Scottish referendum briefly, noting the uncertainty of the outcome has raised the volatility in the foreign exchange market.

Domestically, policymakers anticipated that economic activities in the third quarter would continue to grow ‘at a rate at or above long-term averages’. Yet, they remained weary that growth might ease in the fourth quarter amidst signs from ‘business expectations, from indicators on manufacturing and exports, and from the housing market’. The BOE also raised concerns over the economic weakness in the Eurozone, noting that the weakness, while temporary for the time being, might extend to a prolonged period. The minutes stated that a prolonged period of poor growth and very low inflation could have a larger impact if it led once again to uncertainty about the sustainability of euro-area public and external debt’. The situation could damage confidence and disrupt financial markets, and, as a result, the downside risks to U.K. growth in the medium term had probably increased.’

While the Scottish referendum on September would be a tight race, the BOE only touched it briefly. It acknowledged the volatility in the pound but indicated that, despite the decline, the currency remained ‘+12% above its early-2013 trough and this would continue to put downward’.

On the monetary policy, 7 members voted to keep the Bank rate unchanged at 0.5% and the asset purchase program at 375B pound. The decision to maintain the exceptionally loose monetary stance was based on the judgment that ‘premature tightening in monetary policy might leave the economy vulnerable to shocks, with the scope for any stimulus that subsequently became necessary being limited’. Moreover, rate hike ‘well ahead of any prospective pickup in wage and income growth risked increasing the vulnerability of highly indebted households’. The remaining 2 members opted for a 25-bps rate hike, noting that ‘wage growth might pick up quite sharply as slack was absorbed’ while signs of easing in 4Q14 ‘were as yet only tentative’. They also agreed to leave the size of asset purchases unchanged.

Separately, the latest employment report showed further improvement in UK’s job market. The headline ILO-harmonized unemployment rate (3-month) dropped to 6.2%, the lowest in more than 5 years, in July from 6.4% in the prior month. Meanwhile, the claimant count jobless rate fell 2.9%, the lowest since September 2008, in August from 3% in July with the total claimant level dropping for the 22nd straight month, by -37.2K, to 966.5K in August. This was the first time that the figure fell below 1M since September 2008. The July reading was revised to a -37.4K drop from the previous estimate of -33.6K.

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