Bank of England deputy governor Mervyn King quietly dropped his hawkish outlook on the inflation thr...
Bank of England deputy governor Mervyn King quietly dropped his hawkish outlook on the inflation threat earlier this month when he stopped voting for an increase in the bank's repo rate, currently at 4%.
Twice before this year he had voted for an increase.
The return to the fold indicates that the members of the Monetary Policy Committee, which sets the repo rate, are increasingly concerned with the conflicting indicators used to measure whether inflation is likely to increase.
For example, the MPC found a contradiction between the appreciation of sterling, indicating relatively better performance by the UK economy compared to other G7 countries, and the fact the stock market fell significantly in July.
It found it difficult reconciling figures for June with those from May and July due to the effects of the Golden Jubilee long weekend and the World Cup
And there were contradictions between different reports on manufacturing output, with one recently suggesting a big fall in output in July, but the BoE's regional Agents' contacts still suggesting a gradual recovery in the sector.
Discussions between the MPC's members also resulted in the view that the perceived slowdown in the housing market could be short-lived.
There is anectodal evidence that demand for buy-to-let property is slowing, but the BoE says that could be explained by usual seasonal variations.
Meanwhile, mortgage approvals remain at historically high levels and competition in the mortgage market and lower front-loading, i.e., lower interest rates for first time buyers in the initial stages of ownership, are keeping the house price to earnings ratio down.
Also, despite the threat of global deflation and slower than expected pick-up in economic growth in the eurozone and the US, the MPC says it wants to see what happens to equity markets before it takes any decision on lowering the repo rate further.
It says a cut would send the wrong signal about the overall strength of the economy, and it would not want to cut rates only to see share prices fall further forcing another cut that would increase the risk of a sudden rise in inflation, e.g., in the housing market.
Paul Bruns and Elaine Parkes
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