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Bank of England MPC votes 9-0 to hold interest rates

Two hawkish members of monetary policy committee stop calling for rate hike as economic problems deepen

The Bank of England’s monetary policy committee was united in voting to leave interest rates unchanged this month, with the two hawkish members of the committee abandoning their calls for borrowing costs to rise.

Spencer Dale, the Bank’s chief economist, and external policymaker Martin Weale, fell back in line with the rest of the MPC and voted for interest rates to remain at their record low of 0.5%. Minutes from August’s meeting, published on Wednesday morning, also indicated that the prospects of a second bout of quantitative easing in the UK have increased.

The meeting at which Dale and Weale changed their minds took place amid wild swings on world stock markets. The crisis in the eurozone, disappointing GDP growth in the US, and Britain’s own domestic economic problems all persuaded the committee that inflation would drop back to its 2% target without a rise in rates.

“The slowing in world demand growth and the heightened tensions in financial markets meant that the balance of risks to the medium-term inflation outlook had clearly shifted to the downside,” the minutes explained.

The 9-0 vote in favour of leaving rates unchanged was the first unanimous decision on interest rate policy since May 2010 – the month before Andrew Sentance, who has now left the committee, began his calls for a rise.

Adam Posen was again alone in calling for the Bank’s quantitative easing programme to be increased by £50bn to £250bn. But several other members of the nine-strong committee considered whether a fresh round of asset purchases was needed, before deciding not to support Posen.

“Those members concluded that the case was not yet strong enough, particularly in light of the lower path for Bank Rate now implied by financial markets. Further asset purchases might nonetheless become warranted were some of the downside risks to materialise.”

The pound fell by half a cent after the minutes were released to .6354, as traders reacted to the shift away from higher rates and towards more QE.

Ross Walker of RBS said there had been a “clear dovish shift” within the MPC, while Victoria Cadman of Investec said the possibility of a rate hike had been kicked “well into the distant future”.

Weale had been voting for a quarter-point rise in rates since January this year. Dale took his hawkish stance the following month, with both men arguing that inflationary pressures in the UK warranted higher borrowing costs.

Euro fears

The MPC had gathered in Threadneedle Street to discuss on rate policy on 3 and 4 August. The vote came at the end of the two-day meeting, as a stock market rout drove the FTSE 100 index below 5500. The markets clearly dominated attention – with the minutes stating that “markets had been unsettled during the month, and had become particularly stressed in the days immediately preceding the committee’s meeting.”

A week before the meeting, preliminary data had shown that the UK economy had grown by 0.2% during the second quarter of 2011. The MPC predicted that underlying growth in the economy was probably stronger, but cautioned that it will remain “significantly below the level corresponding to a continuation of its pre-recession trend”.

The MPC also concluded that the European debt crisis was the single biggest threat to the UK’s economic prospects. The policymakers predicted that concerns about the euro area were already hitting household and business confidence, and having a negative effect on bank funding costs and asset prices. © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds