Excerpts from the Minutes of the Monetary Policy Committee meeting ending on 13 April 2016:
Developments over the past month had done little to change the broad outlook for activity and inflation. Downside risks around near-term Chinese growth had lessened, following the authorities’ announcement of plans to target only a modest slowing in demand in 2016 and some supportive activity indicators – although the achievement of a smooth rebalancing of the Chinese economy would remain a challenge. In contrast, the United States appeared to have been weak in Q1. Nevertheless, the Committee continued to expect global growth to be somewhat subdued by historical standards.
There had been signs that uncertainty relating to the EU referendum had begun to weigh on certain areas of activity. Media references to uncertainty had jumped, though the impact of this on household spending was unclear. The likelihood that some business decisions would be delayed pending the outcome of the vote was consistent with the easing in survey measures of investment intentions, reports of the postponement of IPOs and private equity deals and a softening in corporate credit demand. The fall in commercial property transactions in Q1 had been particularly striking. Thus, there might be some softening in growth during the first half of 2016.
The appropriate policy stance depended on an assessment of the nature and likely persistence of shocks hitting the economy. The Committee noted that referendum effects were likely to make macroeconomic and financial market indicators harder to interpret over the next few months. As a result, the Committee was likely to react more cautiously to data news over this period than would normally be the case.
The Committee considered the likely implications for monetary policy of a vote to leave the European Union. Such a vote might result in an extended period of uncertainty about the economic outlook, including about the prospects for export growth. This uncertainty would be likely to push down on demand in the short run. Uncertainty regarding the supply side of the economy might also increase, reflecting any alterations to product or labour market regulation, adjustments in labour flows or changes in the rate of technology adoption as a result of different arrangements governing foreign trade and capital flows. A vote to leave could have significant implications for asset prices, in particular the exchange rate. The MPC would have to make careful judgements about the net effects of these potential influences on demand, supply and inflation. Ultimately, monetary policy would be set in order to meet the inflation target, while also ensuring that inflation expectations remained anchored. Whatever the outcome of the referendum, the MPC would use its tools to achieve its inflation remit.
Taking into consideration all of the recent developments, the Committee was unanimous in concluding that maintaining the current stance of policy was appropriate at this meeting. The Committee’s best collective judgement was that it was more likely than not that Bank Rate would need to increase over the forecast period to ensure inflation returned to the target in a sustainable fashion, although there remained a range of views about the outlook for activity and inflation and the associated risks.