By ADRIAN LOWCOCK 23/07/2009
This week, the Bank of England (BoE) published its minutes for the Monetary Policy Committee (MPC) meeting that was held on the 8th- 9th July 2009. All nine of the MPC’s policymakers voted to keep interest rates at 0.5% and to maintain the £125 billion asset purchase facility (APF), under the quantitative easing policy announced in March 2009. The minutes showed the MPC did not believe there was enough evidence to support a change in policy and August’s Inflation Report would provide an opportunity to reassess the stock of asset purchases.
Financial markets
The BoE concluded that market participants had become less optimistic about the outlook for the world economy. This change in sentiment affected long term interest rates, which have eased back recently, following rises over the past few months and the price of oil fell 9% since the June MPC meeting. Corporate bond spreads continue to fall, by around 0.6% reflecting a general improvement in liquidity and as a result of the APF.
International economy
There have been further signs in June that the global economy has approached a trough in activity. However, individual economies have been recovering at different rates. Chinese manufacturing has demonstrated signs of a recovery and likewise, the US displayed signs of improvement, whilst the European Economy remained well below the UK and US, with a drop in services business activity.
The BoE concludes the global outlook remains extremely uncertain. Whilst the US housing market still remains vulnerable, price declines have moderated but the number of vacant properties remained high, there is a risk this could slow down any recovery.
Our opinion
As mentioned our recent Quantitative easing article, we think the MPC is right to hang fire. The jury is still out as to whether QE will succeed in achieving its desired objectives, but there is also a danger that being too aggressive too soon will result in raised inflationary expectations.
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