The latest minutes of the Bank of England Monetary Policy Committee (MPC) for their meeting on 8th and 9th of February reveal their current thinking.
They point out that improved sentiment in the financial markets since the European Central Bank three year long-term refinancing operation in December has persisted.
Whilst the cost of bank financing appears to have fallen since the second half of 2011, it continues to remain higher than it was in 2010 and the first half of 2011.
The MPC looked closely at the continuing crisis in Europe when they met.
Whilst conditions in Europe appear to have improved, particularly in Spain and Italy, investors remain cautious over the levels of debts in these countries which is likely to make them less competitive.
Longer-term interest rates in the UK have risen slightly, reflecting market expectations that the MPC would vote to increase the size of their asset purchase programme at the meeting. As we already know, the market made an accurate assessment and the quantitative easing was in fact extended.
Noting increases in the level of major international equity markets, the Bank found it hard to explain these movements.
They felt it was plausible it could reflect a fall in the risk premium investors required for holding equities, possibly due to a reduction in the downside risks following the European Central Bank action in December.
Global economy
Looking at the state of the international economy, the Bank believed there has been some positive news to consider. The reasons for an improvement in activity remain unclear however.
The minutes go on to review a series of economic indicators from around the globe, before concluding growth in the first quarter of this year is likely to beat previous expectations.
Ahead of their decision to expand the programme of quantitative easing, the Committee noted that money growth had been weak in the final quarter of last year. This remains a volatile indicator which makes it difficult to establish whether the latest quarter of data is a reliable indication of a developing trend.
Cost of credit
One aspect that has never seemed to improve since the global financial crisis is the availability and cost of credit for many households and businesses in the UK.
The Bank noted that further strains in bank funding markets in the second half of last year have now increased the cost of borrowing further still. They do expect bank funding markets to improve which should, in time, reduce the cost of borrowing for British households and businesses.
This improvement in bank funding could of course be derailed. We continue to hold the view that the banks will build their balance sheets and the expense of affordable lending, at least for the foreseeable future.
Inflation, inflation, inflation
Looking at price inflation, the Bank has done a good job of accurately forecasting a recent decline. The Bank outlook for domestically generated inflation now looks rather uncertain.
They do however believe that inflation is more likely to be below target than above it for a good part of the forecast period. If this proves to be accurate, we could expect to see a period of price inflation at under 2% in the coming years.
In terms of the longer term forecast for the UK economy, the Bank believes output is unlikely to surpass its pre-recession level until around five years after the start of the recession. They note that the supply capacity of the UK economy has been growing ‘unusually slowly’ since the start of the global financial crisis.
There should still be sufficient spare capacity in the UK economy, and this will help to keep inflation down despite the Bank pumping more liquidity into the economy.
As we already know, the Bank decided at this meeting to keep interest rates on hold at the historically low rate of 0.5%. We now know from the minutes that this was a unanimous decision.
This reinforces our own belief that interest rates will remain very low for the remainder of 2012 and possibly the whole of 2013 as well, before starting to increase in 2014.
On the vote for an extension to the asset purchase (quantitative easing) programme, seven members of the Committee voted for this and two against. However, the two Committee members voting against the move wanted to increase the size of the programme by £75bn to a total of £350bn.
This vote shows that there was a real appetite for increasing the size of the asset purchase programme and it could still be extended further later this year.
Request a no-obligation free meeting with a Financial Planner
Photo credit: Flickr/howzey
After a lengthy night of negotiations, another eurozone bailout deal appears to have been agreed for the Greek economy.
Structured investment products, a perennial favourite of the banks, are in the spotlight again after the FSA fined Santander for failures relating to their sales of these products.
In a continuation of their usual headline themes (cold weather, Princess Diana and pensions), the Daily Express today claims that we are facing a new tax raid on pensions.
The FTSE 100 index of leading UK company shares finished the week at 5,905.07, up 19.69 points or +0.33% on the day and up 52.68 points (+0.90%) over the week.
Despite a fall in the rate of inflation this week, price inflation remains high for the elderly.
Investing is a lot like dieting; you know that you should do it but there a many more exciting options. Ways to give you that short term ‘sugar rush’; a bit of retail therapy for instance. 
We are pleased to announce that Informed Choice chartered financial planner Martin Bamford has been shortlisted for three awards at the Unbiased.co.uk Media Adviser Awards 2012, including the prestigious IFA of the year title.
Some new research from Prudential has found that more than 10% of people who were planning to retire in 2012 are going to defer their retirement.
The latest price inflation figures show another sharp fall in the rate of the Consumer Prices Index (CPI) in January, as the VAT increase from last year falls out of the calculation.
