BOE Votes Unanimously To Leave Rates And Asset Purchases Unchanged

The BOE minutes indicated that policymakers voted unanimously in December to leave the Bank rate at 0.5% and the asset purchase program at 275B pound. While all of them believed the current global and domestic economic situations did not warrant for monetary easing, they were split on the implications of the November inflation report. While some believed further expansion of the asset buying program would be inevitable, others viewed that the risks to inflation around the target were more balanced in the medium-term.

Policymakers acknowledged the sovereign debt problems in the Eurozone and risks to domestic growth outlook. Yet, all members agreed that “given the magnitude of the current uncertainties, in the external environment in particular, relative to the precision with which the appropriate stance of policy could be calibrated, there was little merit in changing the path of asset purchases at this meeting”. Despite the pause, the BOE realized the need to support the UK’s banking sector. On Monday, Governor Mervyn King said the Financial Policy Committee needs sufficient powers to ensure it can deal with risks to financial stability. The Committee discussed a number of tools among which countercyclical capital buffers and maximum leverage ratios appeared more feasible.

The MPC members were divided over the inflation outlook. As stated in the minutes, “some members continued to note that the balance of risks to inflation in the November Inflation Report projections meant that a further expansion of the asset purchase program might well become warranted in due course” while others “judged that the risks to inflation around the target were more balanced in the medium term”.

The pound advanced although the BOE minutes were mildly dovish as some members favored further QE in coming months. Moody’s warning of UK sovereign debts did little to cap the rebound in market sentiment in the near-term. The rating agency said that “the UK sovereign faces rising challenges, which means that there’s a reduced ability to absorb further macroeconomic or fiscal shocks”. Moreover, although the UK’s outlook on the Aaa rating is “stable”, “the amount of headroom that existed before has reduced”.