Policy decision: The MPC voted unanimously to leave the Bank rate at 0.5% and the target for the asset purchases unchanged at GBP 375bn and no member thought it appropriate to tighten the stance of policy at the current juncture according to Minutes.
Monetary policy implications: The MPC was more upbeat on growth outlook as domestic indicators as well as growth in the euro area have been better than expected and present an upside risk to the growth forecast. Nonetheless the MPC thought the outlook for inflation remained broadly in line with the August forecast, though a stronger GBP has reduced the probability that inflation would be above the 2.5% knock-out condition in 18-24 months. The MPC still viewed the unemployment rate as stable around 7.8% despite a drop in unemployment to 7.4% in June. Finally the MPC made some comments related to the housing market after house prices had started to rise again. If real house prices continued to rise rapidly it could “become more of a concern” but the MPC noted there were other instruments to mitigate this development. Hence to summarize the MPC was more upbeat on growth, while a stronger currency reduced upside risks related to inflation. Most likely growth will have to be revised higher which could move the timing of the first hike forward. On the other hand that improvement has been supported by a stronger currency which has reduced the outlook for inflation. All in all, Minutes from the September meeting do not make us change the timing of the first hike, which we expect in the second half of 2015 and in that sense current market pricing appears too aggressive
Outlook on growth: Domestically, there were increased signs that the recovery was taking hold and survey indicators of activity had been upbeat. Those data presented an upside risk to the growth profile described in the August Inflation Report. Internationally, there were signs that growth in the euro area – the United Kingdom’s largest trading partner – had been stronger than the Committee had anticipated.
Outlook on inflation: The outlook for inflation remained broadly as set out in the August Inflation Report. The 4% increase in the sterling price of oil would be likely to raise the near-term profile for inflation; while the appreciation of sterling, if sustained, would bear down on inflation further out. This meant that inflation was marginally less likely to be above the 2.5% inflation knock-out level in 18-24 months.
Outlook on unemployment: The LFS unemployment rate, upon which the Committee’s forward guidance threshold was based, had been 7.8% in the three months to June. The unemployment rate for the single month of June was estimated to have been 7.4%. While the single-month unemployment data were a helpful input to the Committee’s analysis, members did not place a great deal of weight on them.
Outlook on housing market: Activity in the housing market had been picking up. Monthly mortgage approvals had increased by almost a third over the past year. And, according to the average of the main lenders’ indices, nominal house prices in July stood around 4% higher than a year earlier. Some rise in prices might provide a modest fillip to consumer spending and investment although the property market developments would become more of a concern if a period of rapid real house price increases appeared in prospect. The Committee noted the fact that the Financial Policy Committee and the Prudential Regulation Authority now had a range of instruments they could deploy to mitigate this.
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