Bank of England remain deeply cautious on 'green shoots'
Members of the Bank of England’s monetary policy committee took a deeply cautious view of much-heralded “green shoots” pointing to a tentative economic recovery when they met earlier this month.
Minutes of their meeting on June 3 and 4 show no arguments were put for a slowdown in the Bank’s £125 billion “quantitative easing” programme to counter the recession by pumping newly created money into the economy, let alone to raise interest rates from the present 0.5 per cent.
Instead, the nine committee members voted unanimously for no change on either front.
The Bank said it has so far deployed £80 billion, most of it used to buy Government stock. It will take another two months to commit the remaining £45 billion.
Summarising the reasons for this caution, the minutes said “Even if developments over the month had been positive, the increase in confidence apparent in some financial market indicators and home household and corporate sector surveys remained fragile.
“Adverse shocks had the potential to de-rail the improvement in confidence and forestall the recent improvement in economic conditions.”
In particular there was no compelling evidence that the banks were lending more freely. “This”, the minutes added, “highlighted the importance of banking continuing to strengthen their balance sheet without constraining lending.
“It would be premature to conclude from the most recent data on consumption that the risks of a pronounced rise in household savings had diminished. Savings could rise sharply if households became more uncertain about their job prospects, revised down their expectations of future post-tax income or became more pessimistic about their future access to credit.”
The minutes contained only one brief, passing mention of how the Bank might tackle the potentially inflationary aftermath of “quantitative easing”.
The committee, they said, “could and would tighten policy once the current exceptional degree of monetary stimulus was no longer warranted”.
Hetal Mehta, senior economic adviser to the Ernst & Your ITEM Club, said: “Despite acknowledging the outlook for credit supply remaining constrained, the Bank has not made any noises about further loosening of policy. Since the risks of not giving the economy enough of a boost outweigh that of giving it too much, ITEM believes that the Bank should not wait too long before expanding the programme.”
Vicky Redwood, UK economist at Capital Economics, noted that the tone of the minutes was more upbeat than some committee members’ speeches.
“There is nothing to suggest the committee has significantly changed its previous view about the growth and inflation outlook,” she added. “There are no signs that the MPC is about to shift its bias towards looser policy any time soon.”
Howard Archer at IHS Global Insight was less sure. “It is clear from the minutes that major concerns and uncertainties persist within the committee over the strength and sustainability of any economic recovery,” he said.
