MINUTES OF THE MONETARY POLICY COMMITTEE MEETING HELDON 11 AND 12 JANUARY 2012
Before turning to its immediate policy decision, the Committee discussed financial marketdevelopments; the international economy; money, credit, demand and output; and supply, costs andprices.
While the most recent data from the United States had been a supportive influence on financialmarkets over the month, the main events affecting asset prices had continued to be those in the euroarea. The three-year long-term repo operation by the ECB on 21 December 2011 had improvedmarket sentiment and a number of banks had been able to issue public unsecured term debt. MajorEuropean banks’ issuance in 2012 had already exceeded that in the whole of the second half of 2011.So far it had been the large, more highly rated, banks that had issued, albeit at spreads that hadremained elevated. Issuance of secured term debt by banks had also been relatively robust.
Banks were reported to have used the long-term repo operation to provide funding for existingbank balance sheets, potentially reducing pressures to de-lever, rather than to expand balance sheets.It was unclear to what extent banks might increase their purchases of sovereign debt of the vulnerableeuro-area countries in future, although two-year Spanish and Italian yields had fallen on the month.A second ECB operation would take place at the end of February.4
Ten-year German bond yields, which had moved erratically during the latter part of 2011, hadfallen back below 2%. But government bond yields in many other euro-area countries had remainedhigh. Over the month, ten-year spreads to bunds had widened a little for Spain and substantially forItaly. In the United Kingdom, ten-year gilt yields had fallen to new lows of around 2% in lateDecember. Real long-term yields on gilts had been below 0% over recent months and they hadaccounted for the larger part of the movements in nominal yields during 2011.5
Short-term interest rates were little changed in the United Kingdom, but had fallen in the euroarea, in part reflecting the ECB’s policy rate reduction in December. The euro effective exchange rateindex (ERI) had weakened by around 3½% in the past month. Over the same period, the sterling ERI