MPC minutes strike a dovish tone

23 April 2014

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  • MPC minutes strike a dovish tone
  • We expect Bank rate to remain on hold until 2015 Q3.
  • Borrowing scrapes in just below OBRs forecast

Martin Beck senior economic adviser to the EY ITEM Club comments on today’s MPC minutes and public finances figures:

On the MPC minutes:

“The minutes for April’s MPC meeting saw little tangible change in the key messages around monetary policy, with the MPC once again unanimous in keeping policy unchanged. April’s meeting occurred before the release of the most recent labour market data (which showed unemployment dipping below 7%), so policy continued to be guided by ‘Phase 1’ of forward guidance.

“The Committee noted growing activity in the economy and expect quarterly GDP growth to come in at 1% in Q1, in line with our expectations. That said, the minutes struck a dovish tone, highlighting downside risks to activity. This stemmed from the large current account deficit and noted that, while wage growth was picking up, risks remain that growth could remain weak in the future. The minutes again conceded uncertainty over the degree of slack in the economy, as well as the existence of a range of views among MPC members over the level of spare capacity. But this difference of opinion does not appear to have sparked any disagreement over the stance of policy.

“With prospects for inflation looking benign, thanks in part to the stronger pound, April’s minutes offer few reasons to think that the Bank Rate won’t remain on hold for a considerable time yet. We continue to think that rates will stay at their current 0.5% until Q3 2015.”

On public finances:

Beck continues:

“Meanwhile, public sector borrowing of £6.7bn in March (excluding the impact of financial interventions) took the deficit for 2013/14 as a whole to £107.7bn – a whisker below the OBR’s Budget forecast of £107.8bn. March’s deficit was almost £5bn down on its level a year earlier, suggesting the economic recovery is increasingly making its presence felt in the fiscal numbers. Total central Government receipts grew strongly, with VAT, income tax and corporation tax all recording robust rates of expansion. March saw central Government expenditure actually fall on an annual basis.

“So the public finances continue to show improvement. But with borrowing in the last fiscal year running at 6.6% of GDP, there is still a long way to go in fixing the public finances. Austerity won’t be going away anytime soon.”