The minutes of the May MPC meeting revealed no new lines of discussion in the monetary policy debate amid volatile activity and inflation data. As expected, the votes were the same as in April: 6-3 to hold Bank Rate at 0.5% and 8-1 to hold the stock of asset purchases at 200bn, and, as before, those voting for tighter policy expressed more concern about global pricing pressures and the threat these posed to inflation expectations than did the majority of the committee.
The monthly survey by the BoE’s regional Agents, which was released alongside the minutes, added some colour to the consumer outlook, reporting increasing signs of belt-tightening. Discount retailers were benefiting from consumers ‘trading down’ from mid-range products, spending patterns around pay days had become more accentuated, shoppers were making smaller, more frequent purchases and more households were using cash rather than credit in order to stay within a pre-defined budget. Such behaviour was consistent with a weak outlook for consumer demand, as was factored into the MPC’s demand projections.
In the minutes, the MPC reiterated its view that the recent soft patch in activity was likely to prove negative. However, there was a clear difference of opinion between the hawks and the no-changers about the value of waiting to see how the data evolved over the next few months. The hawks argued that it was unlikely that uncertainty about the strength of demand would be resolved soon as the data were likely to be affected by factors such as the royal wedding and the Japanese earthquake and tsunami. Those in the no-change camp, by contrast, believed that the evolving data “could be revealing” about the underlying strength of demand. We interpret the latter view as implying that a rate change in the next couple of months at least is highly unlikely, although this camp’s opinion that a rate increase “did not need to occur immediately” suggested that there is some nascent impetus to tighten.
The May meeting was Andrew Sentance’s last: he will be replaced by Ben Broadbent in June. As we reported yesterday, in his testimony to the Treasury Select Committee Mr Broadbent did not give the impression of someone who is likely to support immediate policy tightening (see our Instant Insight, 17 May 2011). In contrast to Mr Sentance, he appeared relaxed about inflation expectations and emphasised downside risks to growth. However, he also appeared sufficiently close to the MPC consensus that his ascension to the committee does little to change the outlook for policy. We continue to believe that if the evolving activity data confirm that the recent slowdown was temporary, the MPC will begin to tighten in the summer, albeit gradually and in small steps.
Simon Hayes, BARCLAYS CAPITAL – Foreign Exchange Research