Comments: Slowdown turning the screw

Hawks 5 Doves 4 with all to play for in the next match.

We now have the MPC meeting minutes for July:
http://www.bankofengland.co.uk/publications/minutes/mpc/pdf/2005/mpc0507.pdf

plus the Agents’ summary of business conditions for July:
http://www.bankofengland.co.uk/publications/agentssummary/agsum05july.pdf

The minutes read like someone spiked the drinks before they started – hysteria over data revisions plus more ‘on the one hand, on the other’s than a Hindu temple.

Looking at the evidence though, it’s hard to believe four voted for a cut. The Agents’ seem happy enough. There are no killer items in the body of the minutes. The only scary, recent evidence has been the ‘disturbing’ BCC report about services. But that was only qualitative, not hard numbers.

The argument came down to:

Stick: “There was a danger that a reduction in rates immediately after the publication of the National Accounts data could be misinterpreted as an attempt to target output, whereas the Committee’s remit was to target inflation. Overall, with economic growth stabilizing, there appeared to be no great risk in waiting for more evidence and analysis before deciding whether to change the official rate.”

Fold: “The National Accounts suggested that output growth had slowed more sharply in the recent past than first estimated, now suggesting that growth had been a little below trend for three quarters. That implied a softer outlook going forward. … Nominal GDP growth had slowed. To one member, this suggested that monetary policy was no longer accommodative. Although the further rise in the oil price would tend to push up on CPI inflation in the short term, it would also drag down global growth. Overall, the risks that inflation would be below target in the medium term appeared to have risen. Early action would reduce the risk that greater changes in the policy rate would be needed at some point in the future.”

I’m with cool-hand Merv on this one.

Posted by David Sandiford at July 21, 2005 10:44 AM

Today's retail sales - up 1.3% on the month - add to the fun, not least because they contradict the gloomy survey evidence. But the surveys also suggest July has been poor. The hawks will be encouraged by the retail sales data but the doves will argue they're an aberration. Friday's GDP figures are the key to the rate decision.

Posted by David Smith at July 21, 2005 08:13 PM

The retail numbers for June were good because retailers won’t be stuck with mountains of stock going into the July summer-sales. Even with a difficult July they should clear all their summer stock before the end of August without making losses. Therefore they won’t be forced into redundancies.

I don’t know what to make of the GDP figures. Yes, manufacturers are in trouble but cutting interest rates to engineer a fall in sterling will just push up manufacturers’ input costs – things would get worse before they get better. Meanwhile the service sector, seeing the cost of their foreign holidays, etc. rising, would push up prices to compensate. And why encourage the government to keep spending? Surely a slower economy is the harsh reality needed to stop the waste.

Posted by David Sandiford at July 23, 2005 10:07 AM