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Published by TelegraphUK
Bank of England Minutes MPC June 5-6
Bank of England Minutes MPC June 5-6

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Published by: TelegraphUK on Jun 19, 2013
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10/07/2013

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Publication date: 19 June 2013
MINUTES OF THE
MONETARY POLICYCOMMITTEE MEETING
5 AND 6 JUNE 2013
These are the minutes of the Monetary Policy Committee meeting held on5 and 6 June 2013.They are also available on the Internet
http://www.bankofengland.co.uk/publications/minutes/Pages/mpc/pdf/2013/mpc1306.aspx
 The Bank of England Act 1998 gives the Bank of England operational responsibility for settinginterest rates to meet the Government’s inflation target. Operational decisions are taken by theBank’s Monetary Policy Committee. The Committee meets on a regular monthly basis and minutes of its meetings are released on the Wednesday of the second week after the meetingtakes place. Accordingly, the minutes of the Committee meeting to be held on3 and 4 July will be published on 17 July 2013.
 
 
MINUTES OF THE MONETARY POLICY COMMITTEE MEETING HELDON 5 AND 6 JUNE 2013
1
 
Before turning to its immediate policy decision, the Committee discussed financial marketdevelopments; the international economy; money, credit, demand and output; and supply, costs and prices.
Financial markets
2
 
Financial asset prices had been volatile over the month. In part, this may have reflected shiftingviews of the outlook for monetary policy in the United States and Japan, following positive activityindicators and comments by policymakers. The most significant changes had been in sovereign bondmarkets. In particular, from a low point in early May, ten-year US Treasury yields had risen by around50 basis points, with UK and German ten-year government bond yields increasing by a little less. Inthe United Kingdom, most of the increase had been accounted for by higher real yields; longer-terminflation breakeven rates had risen only a little. Euro-area periphery sovereign yields had also pickedup, but spreads over equivalent German yields had been broadly unchanged, and both Spain and Italyhad begun to issue longer-term debt again in recent months. Japanese government bond yields hadrisen broadly in line with those of other countries over the month, although volatility had increased.
 
3
 
The expected paths for policy rates in the advanced economies had also moved up over themonth. In the United Kingdom, overnight index swap (OIS) rates had been consistent with market participants placing less weight than a month ago on the probability of a cut in Bank Rate in the near term. The first rise in Bank Rate was fully priced into OIS rates by late 2015, around nine monthsearlier than at the time of the May
 Inflation Report 
. The implied paths of expected official interestrates had also moved up in the euro area and United States, with US rates expected to be above thosein the United Kingdom from late 2015. The sterling and euro effective exchange rate indices (ERIs)had changed little on the month; the dollar ERI had risen by around 1.5%.
 
 24
 
The rise in safe yields had been accompanied by falls in some risky asset prices. In particular,equity prices globally had dropped sharply towards the end of May following speculation that the paceof asset purchases by the Federal Reserve might slow. Those falls had more than offset earlier rises,leaving the S&P 500 and FTSE All-Share indices a little lower than at the time of the
MPC’s
Maymeeting; the Topix index was 9% lower. There had also been significant falls in the prices of riskier assets, such as emerging market equities. Corporate bond spreads had risen a little on the month.
 The international economy
5
 
Indicators of activity around the world had been mildly positive, but it remained hard to judgewhether the recovery in growth would be sustained.6
 
In the euro area, output had fallen by 0.2% in 2013 Q1, a slower rate of decline than in 2012 Q4.Output in Germany had been slightly weaker than expected, possibly reflecting an effect from the coldweather that would subsequently unwind. Indicators of euro-area activity had pointed to a stabilisationin output in the second quarter: for example, the manufacturing and, to a lesser extent, services
Purchasing Managers’ Indices (PMIs)
had both risen in May.7
 
The speed at which the euro area returned to more normal rates of growth would depend in parton how quickly the periphery economies were able to restructure. In the run-up to the financial crisis,domestic demand in the periphery economies had probably been growing at unsustainable rates. Thathad put upward pressure on costs in the domestic sector, as illustrated by the significant rise in unitlabour costs in the non-tradable sector in Spain relative to those in Germany. In the periphery,domestic demand had since collapsed and it was unlikely that it would grow as rapidly in the future asit had in the past, implying that output growth would be weak unless net exports expanded. To achievesuch an expansion, labour would need to move into the traded sector, which would probably requiresome further wage moderation.8
 
The latest data on the United States had, on balance, been positive. Non-farm payrolls had, onaverage, risen by around 200,000 per month over the six months to April. The latest indicators hadsuggested healthy rises in durable goods orders, consumer confidence and core retail sales. Butgrowth in total consumer spending had been more subdued. And the PMIs for May had been mixed,with a fall in the manufacturing index and a small rise in the services index. It was possible that the

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