[Dan]

At its last meeting, the BoE left the bank rate unchanged at 0.50% and decided to continue with its programme of asset purchases for the next three months. However, the BoE significantly slowed the pace of expansion of the programme, as only GBP25bn was added. Today, markets were waiting for the minutes in order to garner more signs as to whether the BoE had reached the limits of its QE. The minutes confirmed that there were differences of opinion among MPC members on the medium-term outlook for inflation.

Additionally, the MPC discussed the merits of a reduction in the rate of remuneration on commercial bank reserves in order to ease monetary conditions further. The MPC decided not to make use of this option at the present time but stated that “it might be a useful policy tool in some circumstances, and therefore should be available in the future”.

The minutes confirmed that the decision was motivated by concerns about the strength of the downside risks weighing on activity in the near term. The MPC was particularly concerned about key factors including tight credit conditions, the recognition that a large fiscal consolidation is necessary, uncertainty over future private incomes and the process of adjustment of balance sheets. As the November Quarterly Inflation Report (QIR) had already highlighted, the profile for inflation is “unusually uncertain”, depending on the timing and strength of the recovery, the sensitivity of inflation to the economic slack, exchange rate movements and commodity prices. The minutes confirmed what had already been suggested in the speech by A. Sentance on 16 November. Additional money injections are not expected before the publication of the next Quarterly Inflation Report in February 2010.