LONDON (MktNews) - Two members of the nine strong Bank of England Monetary Policy Committee continued to vote for lower interest rates at the December meeting, but the majority preferred to hold policy steady, with some members arguing that the downside risks to the world economy had eased, the minutes of the meeting published Wednesday showed. External members Christopher Allsopp and Stephen Nickell both voted for an immediate 25 basis point cut in the repo rate, while the other seven members backed unchanged rates.
Both Nickell and Allsopp believed that the outlook for the global economy and domestic investment was "a little weaker" than in the committee's central projection in the Inflation Report. "Domestic inflationary pressures appeared muted," they argued. The high levels of debt in the UK would actually add to downward pressures on economic activity further out, they argued. And the recent rapid rise in consumer debt was a rational response to the economic situation and that a modest reduction in interest rates, "would probably induce only a very modest additional increase in debt levels," they added.
Nickell and Allsopp also argued that the house price cycle may now be moving into its latter stages and that a small cut in interest rates would moderate the downturn. The majority of the MPC, though, argued that the central projection for inflation was consistent with no change in the repo rate. While the news on the global economy suggested there were downside risks to the outlook, these risks had not become worse. Some members also saw these risks as "somewhat less than they had seemed a month ago."
Moreover, the majority of the committee argued that there was an upside risk to inflation from "the persistent strength of consumption and the continued rapid pace of household borrowing and house price inflation." "There remained a concern that households' perceptions of future sustainable levels of consumption might be unrealistic....The longer such misperception persisted, the greater the imbalances in the economy and the consequent downside risks to demand further ahead would become," some MPC members said. All committee members agreed that financial markets around the world had stabilised somewhat and that uncertainties from this source had receded a little. The committee also explicitly said again that monetary policy decisions should not be directed at controlling the housing market. "House price movements were, nonetheless, a potentially important influence on the prospects for inflation," the committee agreed. While the MPC said that high levels of government spending were helping to support the economy, it raised some concern over the longer term fiscal plans.
"While the Pre-Budget Report suggested some uncertainties about the public finances in the longer term, government spending was helpfully supporting domestic demand and, on the Treasury's central view, the fiscal rules were comfortably met," the minutes said. //www.marketnews.com