Despite rising growth momentum, BOE policymakers remained divided on whether when to start tightening. As shown in the minutes for the July meeting, the members unanimously voted to leave the Bank rate unchanged at 0.5% and the size of the asset purchase program at 375B pound. There were discussions about an early rate hike but no consensus had been reached. While some believed risks that a rate hike would undermine the recovery were decreasing, others did not think a rate hike is imminent as there were few signs of rising inflationary pressures. The pound fell against the euro as the minutes turned out be less hawkish than previously anticipated.
On the economy, the minutes noted that the recent trend in UK’s growth has continued to be ‘at or slightly above longer-term averages’ and ‘sustained economic momentum was looking more assured’. It also forecast that the quarterly growth rate in 1Q14 would be revised higher to +0.9%, from previous estimate of +0.8%.Yet policymakers warned of the risks of a gradual slowdown of growth in Given the strength of survey indicators, it remained unclear whether growth would slow modestly in the second half of the year. On inflation, the estimate for the June CPI of +1.9%, an acceleration from +1.5% in May, was probably driven by ‘ unexpectedly strong clothing and footwear prices, perhaps in part reflecting the scale and timing of the summer sales’.
Concerning the job market, the BOE acknowledged that employment had improved more robustly than expected in the May inflation report while the wage growth had been ‘surprisingly weak’. Regarding the divergence in wage and employment, the BOE stated that it might be due to the scenario that ‘lags between any tightening in the labor market and an increase in wages were longer than the Committee had previously judged’. If that’s the case, the increase in employment over the past year would eventually feed into higher wages. Another possibility is that the increase in the ‘effective supply of labor’ had resulted in ‘a greater degree of slack and so restraining wage growth’.
On the monetary policy, the members unanimously voted to leave the Bank rate unchanged at 0.5% and the size of the asset purchase program at 375B pound. While there have been speculations that the central bank should increase interest rates as the recovery gathered momentum, the minutes noted that ‘members had no preset timing for the first increase in bank rate, which would be driven by the data’. The members were divided on the imminence of a rate hike on the current situation. While some judged that ‘the risk of a small rise in bank rate derailing the expansion and leaving inflation below the target in the medium term was receding’, other members suggested that ‘although the domestic economy was growing at or above longer-term average rates, there was little indication of inflationary pressures building’. There were concerned that ‘a premature tightening in monetary policy might leave the economy vulnerable to shocks’.