This month’s surprise decision to hold back from more help for the economy was unanimously agreed by Bank of England rate-setters.
The Monetary Policy Committee (MPC) held rates at 0.5 per cent two weeks ago, but caught markets off-guard by leaving the scale of its quantitative easing (QE) programme unchanged at £125 billion.
Minutes of the MPC’s meeting said there “had not been enough clear evidence” to suggest the QE programme – effectively printing money – should be changed.
The committee will reassess the strategy in the light of the Bank’s latest detailed forecasts on inflation and growth due next month, the minutes added.
Although the MPC noted that corporate credit markets had improved, it will await more reliable figures on growth in the money supply before making a decision on QE.
The committee said survey data signalled a smaller contraction in the economy during the second quarter of the year than seemed likely two months earlier, when it decided to boost QE by £50 billion.
The Bank’s last set of forecasts predicted the Consumer Prices Index – which the MPC is charged with keeping at two per cent – to be well below target, although inflation is proving stickier than the committee expected.
“The surveys suggested that the momentum going into the second half of the year was greater than the committee had expected in May and the near-term inflation outlook may be a little higher,” the minutes said.
The committee is confident that factors such as its own stimulus measures, a weaker pound and firms returning to production will boost activity. But it underlined that the weakness in the banking sector would hamper a strong recovery.
“Most obviously the balance sheets of the financial sector at home and abroad needed to adjust. That would restrain lending and could hold back the recovery in the global economy,” the minutes added.
Jonathan Loynes, of Capital Economics, said the minutes of the meeting were “less dovish” than expected.
“Not only did the committee conclude that the near-term downside risks to GDP had probably diminished, but the near-term peak in inflation was likely to be higher than previously expected.
“Accordingly, no members felt the need immediately to extend the QE programme and it does not appear that the committee has yet asked the Chancellor for permission for more asset purchases beyond the £150 billion already sanctioned.”