Publication date: 24 January 2007
MINUTES OF
MONETARY POLICY
COMMITTEE MEETING
10 & 11 JANUARY 2007
These are the minutes of the Monetary Policy Committee meeting held on
10 & 11 January 2007.
They are also available on the Internet
http://www.bankofengland.co.uk/publi...07/mpc0701.pdf
The Bank of England Act 1998 gives the Bank of England operational responsibility
for setting interest rates to meet the Government’s inflation target. Operational
decisions are taken by the Bank’s Monetary Policy Committee. The Committee meets
on a regular monthly basis and minutes of its meetings are released on the
Wednesday of the second week after the meeting takes place. Accordingly, the
minutes of the Committee meeting held on 7 & 8 February will be published on
21 February 2007.
MINUTES OF THE MONETARY POLICY COMMITTEE MEETING HELD
ON 10-11 JANUARY 2007
1 Before turning to its immediate policy decision, the Committee discussed developments in
financial markets; the international economy; money, credit, demand and output; and supply, costs
and prices.
Financial markets
2 In the United Kingdom, the United States and the euro area, short-term interest rates had risen by
around 30 basis points since the Committee’s December meeting and longer-term forward rates had
risen by 10-30 basis points. Interest rates had risen steadily over the month and there had been no
obvious single explanatory factor. In the United Kingdom, market prices were now consistent with a
further increase of 25 basis points in Bank Rate in the next few months and a relatively flat profile
thereafter. Expectations for interest rate increases in the euro area had also firmed and expectations of
cuts in the United States had diminished somewhat.
3 Foreign exchange rates were little changed on the month. The sterling effective exchange rate
index (ERI) had remained near the top of the range it had occupied for the previous decade. Estimates
published by a number of economic commentators were all consistent with a long-run equilibrium
exchange rate below the current level.
4 The major equity market indices in Europe and Japan had risen again on the month, despite
rising real interest rates. There had been general buoyancy in asset prices, which some thought partly
reflected the expansion in global liquidity and credit. Relatively low interest rates, for example in
Japan and Switzerland, might be helping to fund cross-currency investments into higher yielding
assets, with investors assuming that low exchange rate volatility would persist, as implied by options
prices.
5 Estimates of the equity risk premium seemed not to have declined in line with the continuing
compression of spreads for more risky fixed-income assets. One possible explanation of this could
have been the strong income growth and high saving rates in Asian countries which tended to invest in
fixed-income securities rather than equities.
2
The international economy
6 The news on the world economy during the month pointed to continued growth in the United
Kingdom’s major overseas markets. Survey and official data for the euro area in the fourth quarter had
been consistent with GDP growth slightly above trend. The apparent weakness in German retail sales
growth in 2006 remained a puzzle given the increase in VAT that had been announced for the start of
2007. But stronger employment growth in Germany seemed likely to support household income and
hence future consumption spending.
7 In the United States, the fall in home sales had shown some signs of leveling off and there was
little evidence of a significant spillover from the weak housing market to consumption. Employment
growth was particularly robust in the fourth quarter and this would support consumption. The Institute
of Supply Management (ISM) manufacturing survey index for December had been consistent with
some degree of expansion in output. The ISM non-manufacturing index had eased slightly, but
remained high. GDP growth in the fourth quarter seemed likely to be firm. It now seemed more
probable that the United States would experience only a modest overall slowdown in growth,
concentrated in residential investment and the auto sector.
8 The spot price of oil had fallen by nearly 18% on the month, reflecting unusually mild winter
weather in the United States and high stock levels. In the previous week the prices of several metals
had fallen. In the euro area, the flash estimate of HICP inflation for December was for an unchanged
rate of 1.9%. US CPI inflation had picked up to 2% in November, from 1.3% in October, as the
negative effect from lower energy prices diminished. Falling US unemployment might presage greater
wage pressures, but the relatively high profit share in the United States suggested that any pickup in
pay growth might not feed directly into higher prices.
Money, credit, demand and output
9 The level of UK GDP had been revised up by some 0.2%, though the estimated quarterly growth
rate in the third quarter had remained at 0.7%. Within the expenditure components, the levels of
consumption and whole economy investment had been revised down, while the levels of net trade and
business investment were higher.
3
10 In December, the CIPS/RBS business activity index for services had recorded a balance of 60.6,
its highest level since June 1997. The Bank’s regional Agents had also reported slightly stronger
service sector output growth. However, the weighted number of profit warnings from service sector
businesses had increased further in the fourth quarter, although it was not clear whether this indicated
something about the level of overall activity, or other factors such as unexpected cost increases.
11 Manufacturing growth in the fourth quarter looked to have been weaker than earlier in the year.
Data from the Office for National Statistics (ONS) had recorded a fall in output in October which was
largely reversed in November, but the CIPS/RBS survey balance had eased further in December.
Taking monthly manufacturing and services data, business surveys and the Agents’ reports together
suggested that Q4 GDP growth would be close to its longer-term potential rate.
12 Expenditure indicators for the fourth quarter indicated reasonably robust growth. Retail sales
had risen by 0.5% in the 3 months to November. And a survey by the Agents had suggested that sales
in December had been higher than a year earlier. In the housing market, the average of the lenders’
house price indices was up 3.7% in the fourth quarter and 9.5% in the year to December. The quantity
indicators gave more mixed signals: loan approvals were high, but the Royal Institution of Chartered
Surveyors’ survey balance for new buyer enquiries had continued to fall. The ratio of house prices to
earnings remained well above its long-run average although it remained difficult to know how much of
this could be justified by a fundamental shift in demand relative to supply.
13 The annual growth rate of broad money (M4) had slowed to 13% in November, but overall credit
growth (M4 lending) had picked up to 16.5%. Nominal domestic demand growth had picked up
during the course of 2006.
Supply, costs and prices
14 The latest Labour Force Survey data, for the three months to October, showed the employment
rate stable at 60.1%, and the unemployment and participation rates as having ticked down to 5.5% and
63.6% respectively. A measure of weighted non-employment appeared to have stabilised in the past
few months. On the supply of labour, there was little indication that the extent of inward migration
would diminish in the near term and there probably remained a degree of slack in the labour market.
4
15 Survey measures of capacity utilisation in manufacturing and services, weighted together to
produce whole-economy estimates, suggested that the degree of spare capacity within firms had been
diminishing. The reports of the Bank’s regional Agents had been consistent with a continued
reduction in spare capacity in both manufacturing and services firms in the fourth quarter.
16 There had been little new information on settlements and earnings. Regular pay growth had
picked up to 3.8% in the three months to October. In November, settlements had remained unchanged
at 3%. A report from Income Data Services (IDS) had recorded that the first few settlements in 2007
had produced a median settlement of 4%, compared with a median of 3% in the fourth quarter of 2006.
But these early settlements related to only 10% of the employees normally covered by January
agreements and they included the later stages of some multi-year agreements.