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Fall in UK output is likely, say MPC members

THE Monetary Policy Committee views a renewed fall in UK economic output in the current quarter as quite likely, minutes of its latest meeting reveal.

BANK OF ENGLAND: All nine MPC members voted to hold base rates at 0.5% this month. Picture: Dan Istitene
BANK OF ENGLAND: All nine MPC members voted to hold base rates at 0.5% this month. Picture: Dan Istitene

The minutes, which underline the grim economic outlook facing the UK, also highlight MPC members' concerns over the gradual appreciation of the pound between mid-2011 and mid-2012. The minutes state the Bank of England committee's view that, against the backdrop of a deterioration in prospects for the eurozone, this rise in the pound has been "unwelcome".

The minutes of the December 5 and 6 meeting, published yesterday, also reveal that MPC member David Miles voted unsuccessfully for a second consecutive month for an immediate increase in the scale of monetary stimulus for the struggling UK economy.

Mr Miles was alone again in voting for an immediate £25 billion rise in the scale of the MPC's quantitative easing (QE) programme, from £375 billion.

The other eight MPC members voted for no change in QE, which is aimed at stimulating activity by boosting money supply through the purchase of Government and corporate bonds, funded by the issuance of central bank reserves.

This vote was viewed by Vicky Redwood, chief UK economist at consultancy Capital Economics, as signalling the MPC is in "wait-and-see mode" on the question of further QE.

All nine MPC members voted to continue to hold UK base rates at their record low of 0.5%.

Explaining Mr Miles's stance, the minutes state: "For one member, the case for undertaking additional asset purchases at this meeting was ... strong. On balance, the near-term outlook for growth seemed a little weaker.

"Although inflation had risen again, and seemed unlikely to fall very substantially below the 2% target in the medium term, the degree of slack in the economy, and the likely response of supply capacity to increased demand, meant that it would be possible to achieve higher output growth without causing any material inflationary pressure. That would help to avoid potentially lasting destruction of productive capacity and increases in unemployment."

The minutes highlight signals from surveys and official data of broadly flat underlying output, and expectations of above-target inflation in the near term. They emphasise MPC members' continuing belief that the 1% quarter-on-quarter jump in UK gross domestic product (GDP) in the three months to September was fuelled by temporary factors, including a boost from the London 2012 Olympics and a rebound from a second quarter, in which activity was depressed by the Queen's Diamond Jubilee holiday.

Detailing MPC members' discussion of the near-term UK economic outlook, the minutes state: "The committee's best judgment was that the outlook was for broadly unchanged underlying output over the turn of the year. Taken together with the unwind of the third-quarter boost to GDP from the Olympic Games, it was quite likely that headline GDP would register a contraction in the fourth quarter."

The minutes add: "The major business surveys had provided mixed messages, and it remained difficult to know how much weight to put on them as, taken together, they had recently been giving a weaker signal than the official output data. On balance, the surveys, taken in conjunction with the October industrial production data, were consistent with broadly flat underlying output in the near term."

Meanwhile, the minutes highlight MPC members' disappointment over the UK's trade deficit, which widened further in October, and their awareness of the weakness of service sector exports.

On the goal of rebalancing demand in the UK economy towards net exports, the minutes state: "The extent of external rebalancing over the past two years had disappointed. It seemed that only a portion of the disappointing trade performance had been accounted for by weaker demand growth abroad relative to that in the United Kingdom. Much of the weakness relative to past trends had been concentrated in exports of services, especially of business and financial services."

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