According to the minutes
of the Monetary Policy Committee
, members of the MPC
considered a reduction in interest rates of two percent before they voted to lower by just 1.5 points earlier this month. Members were worried this could be too much of a shock for financial markets.
“a key concern was the degree of surprise to financial markets. Too large a surprise could pose upside risks to the inflation target if the resulting depreciation of sterling was excessive. There was a risk that such a move might be misinterpreted as a change in the Committee’s reaction function, which would damage the credibility of the inflation target.”
But in a clear signal of further reductions to follow, the minutes went on to say “That suggested leaving some of the required monetary loosening until after the Committee had had an opportunity to explain its change of view on the outlook for inflation in the November Inflation Report, and to assess the market reaction to both the Report and the decision. “ Note the use of the term required.
In addition in reducing rates by just 150 basis points, the MPC was anxious a) to assess the impact of loosening in monetary policy and b) to measure the size of the fiscal stimulus to be announced next week.
Minutes of the meeting, released this morning, showed all nine members
of the monetary policy committee voted in favour of the cut, which took
the Bank’s base rate to 3% from 4.5%.
We are all doves now.