Bank of England officials said low oil prices and subdued wage growth will keep a lid on inflation as they left their key interest rate at a record low.
In the minutes of its December meeting, the Monetary Policy Committee weighed “robust growth” in spending against weak overseas demand and expressed concern over the feeble impetus for prices. It said eight of the nine-member panel voted to leave the benchmark rate at 0.5 percent this month, with Ian McCafferty maintaining his call for a 25 basis-point increase.
“There would need to be a sustained firming in domestic cost pressures, compared with current rates,” to push inflation back to the 2 percent target, officials said. “The price of oil had fallen markedly again, increasing the likelihood that headline inflation rates would remain subdued, and nominal-wage growth had leveled off.”
Inflation stayed below zero for a second month in October and recent economic data has been mixed, giving the BOE room to maintain its emergency policy settings for now. While the minutes stated there was “no mechanical link” between the BOE decision and those of other central banks, it is caught between a European Central Bank that’s adding stimulus and a U.S. Federal Reserve that may be just a week away from the first increase in its key rate since 2006.
“I was expecting a little more hawkishness given the way the BOE seemed to think that markets had maybe over-interpreted the stance in November,” said Kallum Pickering, an economist at Berenberg in London, who changed his forecast on Wednesday for the next increase in bank rate to May from February. “Overall, it’s much more of the same. They’re clearly still puzzling with the labor-market developments.”
The pound fell after the release, and traded down 0.4 percent at $1.5126 at 12:43 p.m. London time.
The MPC said prospects for international and domestic activity hadn’t changed that much since the November meeting and noted that “the more material news on the month had been in costs.”
Last month, the central bank noted that falling commodity prices and an increase in the pound were damping prospects for inflation. Since then oil has fallen further, with Brent crude dropping below $40 a barrel this week. A trade-weighted measure of the pound has jumped almost 6 percent in the past year.
Returning inflation to target “depends on an increase in domestic cost growth sufficient to balance the drag on prices from very subdued global inflation and past increases in the value of sterling,” the minutes said.
Inflation may turn positive in November, officials said, however “core inflation remains subdued,” the the minutes showed. Overall, the balance between growth in pay and productivity is “a key aspect” of the MPC’s policy assessment.
While the BOE said the government’s fiscal plan, outlined in the Autumn statement, might reduce the drag on demand next year, it said overall “fiscal consolidation will continue to weigh on growth.”
Economists predict the panel will keep the key rate unchanged until well into next year. Investors are betting the rate will stay unchanged through 2016, according to forward contracts based on the sterling overnight index average, or Sonia.
Thursday’s policy summary said the bank intends to bring inflation back to its target “without an overshoot once persistent disinflationary forces ultimately wane,” echoing a line from its November statement.
McCafferty voted for an increase for a fifth consecutive month. He thought the “risks around domestic cost growth were to the upside and were sufficient to justify an immediate increase,” the minutes showed.