BoE October Minutes Show MPC Voted Unanimously To Cut Bank Rate in Joint Action

(RTTNews) - Policymakers stood united in deciding on a rate cut as the UK economy apparently entered recession. The minutes of the Bank of England’s rate setting session released on Wednesday revealed that the members voted unanimously to reduce the bank rate to 4.5% in an unscheduled meeting on October 8.

In the special meeting, all the nine members of the Monetary Policy Committee or MPC voted for a 50 basis points cut. In a coordinated move, the Bank of Canada, the European Central Bank, the US Federal Reserve, Sveriges Riksbank and the Swiss National Bank slashed their key interest rate.

Given the global nature of the financial market turbulence, there was a strong argument for participating in the proposed coordinated international action.

The MPC assessed that the economic activity deteriorated substantially, reflecting a sharp monetary contraction. The squeeze on real incomes reduced consumer spending, while business and dwellings investment also declined. The minutes said, “The weakness in output growth at home was likely to open up a growing margin of spare capacity that would over time bear down on inflation.”

The risk of a sharper monetary contraction rose over the month, resulting in a higher risk of more pronounced slowing in activity and employment than what is needed to keep inflation at target in the medium term, the minutes said.

Earlier, the BoE Governor, Mervyn King assessed that the Monetary Policy Committee would continue to set interest rate in order to meet the 2% inflation target. Consumer price inflation has reached a worryingly high rate of 5.2% in September.

The governor added that the MPC will act promptly to ensure that inflation remains on track to meet target. The Governor said it now seems likely that the UK economy is entering a recession.

The MPC judged that, during the last month, the balance of risks to inflation in the medium term had shifted decisively to the downside. Pay growth had remained subdued and commodity price pressures had eased, with oil prices falling substantially from their mid-summer peak.

Conditions in international credit as well as money markets have deteriorated markedly over the prior month. The policymakers said reductions in official interest rates could not be expected to resolve the current financial market problems and need a considerable increase in the capital of the banking sector. Therefore, the committee welcomed the bank recapitalization programme for the major UK banks.

The National Institute of Economic and Social Research said the UK economy is forecast to contract 0.9% in 2009, which is the first full year of recession since 1991. The NIESR expects the Bank of England to cut rates to 4% early in 2009.

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