Thursday, September 06, 2007
Unchanged at 5.75%
Posted by David Smith at 12:15 PM
Category: Thoughts and responses

Nobody will have been surprised by the monetary policy committee's decision to leave Bank rate unchanged at 5.75%. Usually in these circumstances the MPC leaves the decision to speak for itself. On this occasion, however, it chose to release a lengthy statement. In summary, it said inflation should remain close to or below the 2% target in the coming months but capacity pressures remain a concern and it is too soon to tell what the effects of the financial turbulence will be. Here's the statement:

"The Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 5.75%.

In its August Inflation Report, the Committee’s central projection was for inflation to remain close to the 2% target over the forecast period and for output growth to ease, reflecting a slowing in both consumer spending and business investment.

In recent weeks, heightened concerns about a variety of asset-backed securities have led to disruption around the world, not only in markets for those financial instruments but also in money markets more generally. The MPC’s mandate is to set interest rates to meet the Government’s 2% target for CPI inflation. So the Committee discussed these developments and other economic data in terms of their implications for the outlook for inflation.

CPI inflation fell back to 1.9% in July and may remain around, or a little below, the 2% target for the next few months. Pay pressures remain muted. There are tentative signs of a slowing in consumer spending. But the recent solid pace of output growth has been sustained and the margin of spare capacity appears limited. Indicators of pricing pressure remain somewhat elevated.

It is too soon to tell how far the disruption in financial markets will impair the availability of credit to companies and households. As stated in its August Report, the MPC is monitoring closely the evolution of both credit spreads and the quantities of credit extended, alongside all other data relevant to the outlook for inflation.

Against that background, the Committee judged that no change in Bank Rate was necessary at this meeting to keep inflation on track to meet the target in the medium term.

The minutes of the meeting will be published at 9.30am on Wednesday 19 September."


The Bank is presumably also having to second guess the impact of the credit squeeze. With money markets pricing risk higher and inter bank lending rates rising it might appear that some of the bank's counter inflationary work is going to be done for it - but equally it means that borrowers can't breathe any great sigh of relief. One might get the impression that the Bank's job has simply grown more difficult - there's yet another significant factor to be accounted for when it makes its inflation targeting calculations

Posted by: Jonathan at September 6, 2007 02:53 PM