Wednesday, July 20, 2011
Bank's dilemma laid bare
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

The Bank of England monetary policy committee's July minutes showed, as expected, a 7-2 vote in favour of keeping Bank rate at 0.5%, with only Spencer Dale and Martin Weale in favour of a quarter-point rate hike and Adam Posen continuing to push for an additional 50 billion of quantitative easing. But the minutes also showed the Bank's dilemma.

On inflation: "Inflation had been well above the 2% target as a result of the temporary boost from higher energy and other commodity prices, the increase in the standard rate of VAT and the past depreciation of sterling. Despite the fall in CPI inflation in June, it was likely that inflation would rise further, to over 5%, in the coming months. In the light of recent developments in utility and food prices, the peak in inflation was likely to be a little higher and come sooner than the Committee had previously expected."

And on economic activity: "The risks posed by an intensification of the sovereign debt and banking problems within the euro area to the prospects for economic activity and the financial system at home had remained substantial. The funding costs faced by the major UK banks remained elevated, in part reflecting those risks emanating from within the euro area, and were likely to continue to affect the price and availability of credit to many households and businesses adversely. Indicators had pointed towards continued modest underlying UK GDP growth in the second quarter and, more tentatively, to some softening in the outlook for the third quarter. But the implications of weaker activity for inflation would depend on the factors that had caused it."

This is a committee that feels itself to be buffeted by events outside its control. Overall, it says, the case for raising rates in the near-term have weakened. It is still relying on domestic factors, spare capacity in the economy, to bring down inflation. For that to happen, these unhelpful external factors will have to go away. The minutes are here.