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Interest rates: what the economists say

The Bank of England monetary policy committee was united in voting to leave interest rates unchanged this month. Here is what economists made of the minutes of the meeting

Chris Williamson, chief economist, Markit

The minutes of the Bank of England’s July monetary policy committee meeting showed all nine members voted to keep rates at the historical low of 0.5%, with Spencer Dale and Martin Weale dropping their calls for a rate hike. It seemed they remained worried about elevated inflation, but the minutes note how “recent developments” – which presumably refers to the weakness of economic growth in the second quarter and escalating debt crisis in the eurozone – had reduced the case for tighter policy.

Only one member – Adam Posen – voted for more QE, but other committee members are open to the possibility of increasing the Bank’s asset purchases if the economic data continue to disappoint in coming months. The business surveys – and notably the PMI (which the Bank watches closely and is highly correlated with rate decisions) – will therefore provide a good guide to future decisions. The all-sector PMI rose slightly in July but remains firmly in territory which is consistent with looser monetary policy. It seems unlikely that the committee would vote for QE2 any time soon, but the case for a further loosening of policy by the end of the year has grown.

Simon Hayes, UK economist, Barclays Capital

We and the consensus had expected another 7-2 outcome, although the dovishness of last week’s inflation report means the switch in vote does not come as a major surprise. The vote to hold the stock of asset purchases at £200bn was 8-1, in line with expectations.

As was clear from the August inflation report, the MPC had become more concerned about the outlook for global activity, and particularly worried about developments in the euro area. Not only had it revised down its view of euro area demand, but it saw additional risks stemming from an intensification of concerns about fiscal sustainability in the currency bloc. For the more hawkish members of the committee, although upside risks to inflation were still perceived to be in place, these developments had “weakened the case for removing some of the monetary stimulus”.

The minutes also record that “some members” (code for more than one but less than a majority) considered the case for increasing the amount of asset purchases. This appears to have been given relatively short shrift, not least because financial markets had already pushed back the timing of the first implied policy rate increase. The committee diligently noted, however, that a further deterioration in the demand outlook might mean more QE would be warranted at some stage.

James Knightley, UK economist, ING

There has been a big shift in the Bank of England’s MPC interest rate decision vote. Previously both Spencer Dale and Adam Posen had voted for a 25bp rate hike, but they have moved back into the fold and so we have a 9-0 vote in favour of no change to Bank Rate. Adam Posen remains the only member voting for an expansion of quantitative easing. Other members suggested that they are considering more QE, but the case is “not yet strong enough”.

Today’s [labour market] figures add weight to the view that a hike in interest rates remains a distant prospect – at least 12 months in our view – while an expansion of quantitative easing remains a clear possibility. Upcoming purchasing managers’ indices will be of major interest and any further falls in these series (manufacturing is already in contraction territory) could swing more MPC members to the “more QE” camp.

Glenn Uniacke, senior dealer at Moneycorp

The most significant point to come out of the BoE minutes is the defection of the two hawkish members of the committee who had previously been supportive of interest rate rises to vote in favour of maintaining the current rate. This move is a tacit admission that the UK is going through a rocky period and the outlook remains negative, exasperated by the economic situation across the eurozone, and in the US.

Malcolm Barr, senior UK economist, JP Morgan

The minutes of the MPC’s August meeting delivered the change in the vote and the overall tone we expected: both Dale and Weale removed their votes for increases in rates, but Adam Posen remained the sole vote for an extension of QE. The minutes echo the themes expressed in the inflation report and accompanying press conference, with the key risks described as located externally while the central view remains for a gradual pick up in UK growth.

We had thought there was an outside chance of Paul Fisher joining the vote for more QE in August, but that did not transpire. Remarks from David Miles this week suggested that he was some way from being persuaded that further QE is necessary. While we suspect that Posen will not remain alone in voting for more QE by the time we get to the November inflation report, our central view remains that a majority for further asset purchases will not form. Commentary from [Charlie] Bean and [Ben] Broadbent will be worth watching in the coming weeks to get a sense of how close they are to voting for more QE. Although governor King is prepared to be in the minority on the vote, we doubt he would be in the vanguard of those for additional QE given the presentational issues created by a near 5% inflation peak in the coming months.

Samuel Tombs, UK economist, Capital Economics

August’s MPC minutes and the latest labour market data strongly supported the markets’ (and our own) assumption that interest rates will remain on hold for at least the next couple of years. The minutes revealed that the committee voted unanimously to keep interest rates on hold for the first time since May 2010. Spencer Dale and Martin Weale both switched their votes from a 25bp hike to votes for no change. While these two members continued to express their concern that inflation could remain above target for a sustained period, “recent developments had weakened the case for removing some of the monetary stimulus”. Note too that the MPC’s meeting on 4 August was before most of the turmoil in stock markets, so it seems unlikely that Dale and Weale will shift their votes back to higher rates any time soon. © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds