The immediate decision: At the June meeting the MPC somewhat surprisingly voted 5-4 for keeping the target for the asset purchase facility (APF) unchanged at GBP 325bn compared to expectations for a 7-2 vote for an unchanged target. More surprisingly governor King was among those members arguing for an expansion of the asset purchase facility by 50bn to GBP 375bn already at the June meeting.
The BOE outlook for inflation and growth: The MPC judged that upside risks to inflation had lessened while downside risks to inflation had grown clearly tilting the balance of risks towards the downside compared to the projection in the May Inflation Report. Among other things falling energy- and commodity prices contributed to this development as well as some data indicating that wage pressure may be easing. Simultaneously there were several factors suggesting an increased downside risk to the growth forecast of a gradual pick-up in growth in the second half of 2012.
Monetary policy and FX implications: As all members judged that the balance of risks to medium-term inflation had shifted towards the downside compared to the previous projection, and most members judged that further stimulus probably was warranted in order to meet the inflation target, the main reason for not adding further stimulus already at the June meeting was uncertainty related to the outcome of several near term events such as the Greek election. With respect to these events some members thought it was better to wait and see the outcome of them before deciding on further policy easing, while some members also remained concerned about how quickly inflation actually would fall back. With inflation falling to 2.8% in May (compared to BOE forecast for 3.0-3.2%) this uncertainty clearly has diminished, which opens up for a unanimous decision to expand the APF by GBP 50bn at the July 5 meeting. Short-term this is likely to weigh on the GBP but considering the effects from the previous two times when the MPC has decided on expanding the APF in 2011 and 2012, and with the BOE also conducting other measures such as “funding for lending”, which potentially could have positive effects on credit conditions and growth, this immediate weakness is likely to be temporary.
SEB