Wednesday, July 21, 2010
The loneliness of the long distance hawk
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

As expected, Andrew Sentance again voted for a quarter-point increase in Bank rate at the July meeting of the monetary policy committee (MPC). As also expected, he was a lone hawk, the other seven members of the MPC opting to leave interest rates unchanged. The MPC will be back to full strength for its August meeting.

Less expected was that the MPC also gavce some consideration to an easing of monetary policy, presumably through some further quantitative easing, before opting to do nothing. This is the key passage from the minutes:

"The Committee considered arguments in favour of a modest easing in the stance of monetary policy. The softening in the medium-term outlook for GDP growth over recent months would put further downwards pressure on inflation, once the impact of temporary factors had waned. Pay growth had remained subdued and there was little sign of a material pickup in medium-term inflation
expectations. A further modest monetary stimulus would act to offset the softening in demand prospects and make it more likely that the inflation target would be met in the medium term.

"But there were also arguments in favour of a modest tightening in the stance of monetary policy. Inflation was likely to remain above target for some months and there was a risk that medium-term inflation expectations would rise. The resilience of inflation over recent months had suggested that the downward impact of spare capacity could be weaker than expected and this created uncertainty around the extent to which inflation would fall back in the future. Demand growth had bounced back internationally, although the geographical distribution remained uneven. The average growth rate of the main measures of UK nominal demand in recent quarters had been around or above historical rates.

"On balance, most members thought that it was appropriate to leave the stance of monetary policy unchanged." The minutes are here.