BOE Voted Unanimously To Keep Rates Unchanged, First Time Since May 2010

The BOE minutes for the August meeting turned out to be more dovish than expected as 2 hawks, Spencer Dale and Martin Weale, stopped pushing for a rate hike, making the decision to hold the Bank Rate unchanged at 0.5% unanimous for the first time since May 2010. Adam Posen continued to favor expanding the asset-buying program by +50B pound to 250B pounds. The pound slid after the minutes as it's increasingly likely that the central bank will adopt further easing.

Policymakers acknowledged the slowdown in economic activities with the greatest downside risk coming from the Eurozone. As mentioned in the minutes, 'evidence of slowing activity, and more particularly, concerns about fiscal policy in the U.S. and the substantial challenges faced by the euro area, had resulted in stressed conditions in financial markets' and 'news over the month had generally reinforced the weak tone of indicators of global activity growth over the past few months'. Indeed, the BOE revised lower the growth forecasts for the UK in light of the current headwind.

It's rather unexpected that the Committee voted unanimously for the first time in more than a year to keep interest rates unchanged. Spencer Dale and Martin Weale, who had favored a rate hike of +25 bps, voted to maintain the Bank Rate at 0.5%. According to the minutes, the 2 members 'remained particularly concerned about risks to the upside associated with a sustained period of above-target inflation'. However, recent developments had 'weakened' the case of tightening.

As far as the asset-buying program is concerned, the minutes unveiled that some members 'considered whether there was a case for increasing' the size. However, the conclusion was that there 'was not yet strong enough' evidence to support the move. Policymakers stated that further increase in the size might 'become warranted were some of the downside risks to materialize'. Adam Posen retained the view that 'the balance of risks to inflation continued to warrant an immediate expansion' of asset purchases. Posen believed that the weak pattern of demand domestically and overseas had evolved broadly as expected…There remained a significant margin of spare capacity' and it's like that 'inflation would fall below the target in the medium-term'.

BoC Leaves Overnight Rate Unchanged, Removes Tightening Rhetoric

As expected, the BOC decided to leave the overnight rate unchanged at 1% and correspondingly, Bank Rate and the deposit rate at 1.25% and 0.75% respectively. The accompanying statement delivered a less hawkish tone than before. As global economic has deteriorated in recent weeks and total CPI inflation will continue to moderate as temporary factors unwind, the central bank believed the need to withdraw monetary policy stimulus has 'diminished'.

The BOC listed a series of events that has caused the recent instability in the economy and financial markets. The European sovereign debt crisis has intensified and 'significant initiatives by European authorities' are needed to resolve the 'acute fiscal and financial strains'. Economic indicators suggested the risk of US recession heightened and fiscal stimulus in the country will 'soon turn into material fiscal drag'. Growth in emerging markets will inevitably be dragged down by weakness in advanced economies.

In Canada, growth eased in 2Q11 as driven by temporary factors and the central bank remained confident that growth will resume in the second half. However, persistent strength of the Canadian dollar will affect net exports which are 'expected to remain a major source of weakness, reflecting more modest global demand and ongoing competitiveness challenges'. Concerning inflation, The BOC expected inflation will ease as high food and energy prices moderate. Yet, the central bank at the same time warned that while 'commodity prices have declined owing to diminished global growth prospects, they remain relatively high'.

Concerning monetary policy, the central bank removed the reference that 'to the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be withdrawn'. Instead, it stated 'in light of slowing global economic momentum and heightened financial uncertainty, the need to withdraw monetary policy stimulus has diminished'. The meeting outcome was largely in line with our expectation. We retain our view that the BOC will leave the policy rate unchanged at least until mid-2012.