BoE Minutes - Three-Way Split Widens

Key points
* BoE voted 6-2-1 to keep the policy rate unchanged at 0.5% at the
meeting on January 13. Weale joined Sentance in preferring a 25bp
hike.
* Minutes will be interpreted cautiously as the MPB weren't aware of
the horrible Q4 GDP figures when setting rates.
* Markets reacted muted to the Minutes despite the change in voting.
* See full Minutes

Contrary to expectations, BoE Minutes showed that the Monetary
Policy Committee voted 6-2-1 to maintain monetary stimulus at the
meeting on January 13. The threeway split widened as Maritn Weale
joined Andrew Sentance in also preferring a 25bp hike while Adam
Posen maintained his call for another GBP50bn in asset purchases.
It is a surprise that Weale joins Sentance – Fischer and Bean had
sounded more hawkish in comments and can still emerge as hawks. The
doves will still be in the majority though and King remains the key to
understanding the MPC way of thinking – and he sounded dovish in his
speech yesterday.

It is important to note that the MPC didn't know anything about the
terrible Q4 GDP when they met earlier in the month. On economic
growth, the MPC stated that "The recovery in the UK [...] had
continued broadly as expected". Gosh!

In We believe the Bank of England will keep the base rate at 0.5% for
most of 2011. Fiscal tightening crowds out monetary normalisation.
With the government's austerity measures weighing on the economy in
H1, we see no reason why the BoE should tighten monetary conditions
before Q4 at the earliest.

Yesterday, the BoE Governor Meryn King said the UK economy's 0.5%
contraction in Q4 proved the recovery would be "choppy". He used the
economic weakness to defend the central bank's ultra-loose monetary
policy in the face of high inflation: "The right course has been set
and it is important to maintain it." King said households would have
to accept a period of austerity because of the need to raise
consumption taxes and cut spending to bring the deficit under control.
The central bank neither could, nor should, try to prevent that
squeeze in living standards, "half of which is coming in the form of
higher prices and half in earnings rising at a lower rate than
normal", he said. The governor predicted inflation would soon rise to
between 4 % and 5%, more than double the bank's 2% target
Next important BoE events are the monetary policy meeting 10 February
and the Inflation Report on 16 February.
Source: ActionForex.Com