BOE Minutes: Sign of Recovery on the Way

BOE members voted, at June's meeting, unanimously to keep policy rate unchanged at 0.5% as well as sticking to the 125B pound asset buying program as it took time to see the impacts of these measures on the economy.

At the minutes, the MPC members stated that 'the risk of a continued sharp contraction in output in the near-term had receded somewhat' while 'The news over the month had been mostly encouraging. Conditions in financial markets had continued to improve'. The central bank acknowledged that 'activity indicators for Q2, especially the PMI surveys, suggested that the rate of contraction in the global and UK economies had slowed, and there were signs of improving business confidence' and 'there had also been signs that the second-quarter decline in consumption would be smaller than the Committee had previously anticipated'. However, the central bank added 'there was no reason to conclude that the medium-term outlook for the economy, and thus inflation, had changed materially'.

The current 125B pound of asset buying program will continue until end of July. This means that policymakers will have to decide whether to extend the program or not at the coming MPC meeting. There's no guidance on the MPC's stance in the minutes.

Released yesterday, headline CPI fell only slightly to +2.2% yoy in May from 2.3% in April while RPI dropped -1.1% yoy, also less than consensus of -1.5% and -1.2% a month ago. At its May Inflation Report, the BOE has expected CPI inflation to average at +1.9% in 2Q09. However, recent trend suggests that the actual outcome may overshoot this target. Therefore, it's possible that policymakers may decide not to extend the current program though they have been approved by the Chancellor to extend up to $150B pound.

While discussions about 'exit strategies' loom as more signs showing the worst of recession has been over emerged, Adam Posen, who will be joining the BOE interest-rate setting panel in September said that the main challenge is to decide when the central bank should stop printing money at the right time.

An unemployment report in May also surprised the market on the positive side. Claimant counts rose 39.3K to 1.54M in May, the smallest increase since July 2008 and less than consensus of a 60K increase. ILO unemployment rate in the 3 months through April rose less than market forecast to 7.2% from 7.1% in the prior month. These readings suggested that the rate of reduction in jobs has probably peaked and the rise in unemployment may continue to slow down in coming months