Bank of England released its minutes, showing growth outlook concerns for the upcoming period where the Prospects for GDP growth had probably deteriorated a little over the month, as stated by the BOE. In addition, due to the weakness in economical conditions that is witnessed in U.K. and abroad, the medium-term outlook for growth might have weakened as well, where financial conditions around the globe is still challenging and firms' access to capital markets is still prejudice.
Inflation was the main debated area in the report where the near-term inflation prospects have Worsened, despite the fact that inflation expectations dropped compared with June's expectations, but elevated inflation levels will be the constant mark and the main obstacle in the path of recovery throughout the remainder of 2010, compared with the outlook that was presented in May's Inflation Report that was released by the BOE.
To cope with rising inflation levels, members voted unanimously on preserving the interest rates at 0.5%, while increasing the standard VAT rate to 20.0% as announced in the emergency budget plan by Chancellor Osborn. The new plan might likely to add further inflation pressures on the economy; accordingly, inflation will remain above its targets for Some Time.
Expectations of a modest easing of monetary policy and the effects it would carry over the upcoming period was debated as well, whereas the weak outlook for GDP growth over the past period will have a downside effect on inflation and force it to drop. On the other hand, tightening the monetary policy would preserve inflation levels to remain above its targets set by the BOE at 2.0% and the upper limit of 3.0%, along with putting more upside pressures on medium-term inflation levels causing it to rise.
Most members preferred to preserve the current stance of monetary policy due to the global outlook and weak economic conditions internationally that would pressure inflation levels to decline, affected by the downside pressures to be imposed on inflation by spare capacity.
Accordingly, members voted unanimously on leaving fiscal policy stance at the meantime, where the BoE stated that the current bank's rate and stock of asset purchases financed by the issuance of central bank reserves remained appropriate to meet inflation targets over the medium term. BoE will maintain the stock of asset purchases financed by the issuance of central bank reserves at £200 billion, but a re-evaluation will take place throughout Augusts' Inflation Report.
Seven members of the Committee voted in-favor of the proposition while member Andrew Sentance voted against the proposition and called for an increase in Bank Rate by 25 basis points along with withdrawing stimulus money that was presented to financial markets, as he argued that the Economic conditions had improved over the past year and the inflation outlook had shifted sufficiently to justify beginning to raise interest rates gradually.