Goldman Sachs’ Analysis of the BoE Minutes

MPC Minutes: 9-0 for Bank Rate Unch. at 0.5%; 9-0 for APF Unch. at £375bn
Bottom line: The vote for unchanged policy in July was unanimous, in line with consensus expectations. Today’s Minutes indicate that, although “the Committee agreed that no increase was warranted at this meeting…for some members the decision had become more balanced in the past few months than earlier in the year.”
1. The key passages of today’s Minutes drew a distinction between two interpretations of the recent UK data, each of which had competing implications for monetary policy.
  • On the first (relatively hawkish) interpretation, the strength of the activity data meant that “the risk of a small rise in Bank Rate derailing the expansion and leaving inflation below the target in the medium term was receding.” Corroborating this view, it was noted that some survey indicators of wage growth had picked up and that the degree of slack in the economy (though uncertain) was likely being used up faster than had been envisaged in the May Inflation Report. This reasoning would advocate a rise in Bank Rate relatively soon, in order to facilitate “a more gradual path thereafter” and allow the MPC “to evaluate the sensitivity of households, firms and financial markets to changes in interest rates” – especially after such a long period anchored at 0.50%.
  • On the second (relatively dovish) interpretation, despite the strength of recent activity data, there had been “little indication of inflationary pressures building” combined with “early signs that global growth was weakening.” This reasoning would advocate a later change in Bank Rate, since “a premature tightening in monetary policy might leave the economy vulnerable to shocks, with the effectiveness of any further stimulus uncertain.”
2. We learned that MPC members placed different weights on each of these arguments. While there was unanimous agreement on no change in policy stance in July, there seemed to be a slight hawkish shift in the centre of gravity of committee views: “for some members, the decision had become more balanced in the past few months than earlier in the year.”
3. Elsewhere in today’s Minutes, the Committee underscored that the momentum in economic growth “was generally looking more assured,” though signs of a slowing housing market would likely weigh on aggregate output in the second half of the year. More specifically, there was some expectation that, in its updated August round of forecasts, the outlook for activity in the housing market “would be slightly less strong” than implicit in the MPC’s May projections. Looking ahead to the August Inflation Report, the MPC also suggested that it would take that opportunity to assess its inflation outlook in light of contradictory signals from recent employment outturns (which seemed relatively strong) versus recent wages data (which seemed relatively weak)

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