Bank of England officials voted 7-2 to keep the benchmark interest rate on hold this month as a majority of policy makers said recent developments meant there was less need for a near-term tightening.
“It was likely that the current weakness in activity would persist for longer than previously thought,” the majority of the nine-member Monetary Policy Committee said, according to the minutes of the July 6-7 meeting published today in London. “That weakness, together with the continued subdued behavior of earnings, reinforced the case that inflation was likely to fall back once the temporary impact of the factors pushing up on it had waned.”
At the meeting this month, there was a “range of views” among the majority of the MPC on the outlook for inflation. “Overall, however, recent developments had reduced the likelihood that a tightening in policy would be warranted in the near term,” the minutes said.
Investors have pushed back bets on when the central bank may increase interest rates as the economic recovery shows signs of slowing and Governor Mervyn King sticks to his line that the current bout of above-target inflation is temporary. Ernst & Young LLP’s Item Club cut its forecast for 2011 U.K. economic growth this week to 1.4 percent from 1.8 percent as Europe’s debt crisis and weak consumer spending weigh on the economy.
While King and six other officials voted to keep the benchmark at a record low of 0.5 percent this month, the minutes showed, Chief Economist Spencer Dale and Martin Weale kept up their push to raise the rate by a quarter point, saying the argument for tighter policy “remained strong.” Adam Posen continued his call for more bond purchases.
In contrast to the June meeting, there was no mention of other policy makers favoring more bond purchases this month. In June, some officials said it was “possible” further asset purchases might become warranted.
The pound erased its decline against the dollar after the minutes were published. It traded at $1.6116 as of 9:59 a.m. in London, little changed from yesterday. It had earlier fallen to as low as $1.6069.
“Interestingly, there seemed to be no substantial discussion of more quantitative easing,” said Hetal Mehta, an economist at Daiwa Capital Markets Europe in London. “With inflation still more than double the 2 percent target, it may be difficult for the focus of the MPC to turn to further stimulus.”
She added that the bank is “now likely to keep rates on hold for a long time to come -- not just this year, but through next year too.”
While U.K. inflation eased to 4.2 percent in June, that’s still more than twice the central bank’s goal. The bank said today that its was “likely” that price growth would exceed 5 percent in the coming months and the peak would be “a little higher and come sooner than the committee had previously expected.”
Policy makers also warned that 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.”
European leaders will meet tomorrow in Brussels to discuss the region’s financial stability and revamp a strategy to contain a debt crisis that threatens to undo Spain and Italy. U.K. Deputy Prime Minister Nick Clegg said July 17 he was “incredibly worried” about the turmoil and that the U.K. was not immune to its effects.
While the U.K. economy grew 0.5 percent in the first quarter, it shrank by that amount in the previous three months. Growth may have slowed in the second quarter, with Markit Economics saying this month that its surveys of manufacturing and services point to gross-domestic-product growth of 0.3 percent “at best.”
“Indicators had pointed toward continued modest underlying U.K. GDP growth in the second quarter and, more tentatively, to some softening in the outlook for the third quarter,” the minutes said.
“Overall, the balance between the upside and the downside risks to inflation in the medium term had not changed sufficiently over the month for the MPC members to change their views of the appropriate setting for monetary policy,” the minutes said. “The risks to inflation in the medium term remained substantial in both directions.”
Investors have pushed back expectations for the next rate increase to beyond June 2012, according to forward contracts on the sterling overnight interbank average. At the start of last month, they were betting on a February 2012 increase.