The Bank of England kept interest rates unchanged at 0.5% at its monthly monetary policy meeting today. The announcement was widely expected by the markets but some analysts were expecting for the decision to be unanimous by the Monetary Policy Committee (MPC) members. One policymaker, Ian McCafferty, had been voting since August 2015 for a 0.25% rise and was once again the sole dissenter at the January meeting.
In its meeting minutes, which are released simultaneously with the decision announcement, the Bank noted that inflation is expected to rise modestly in the coming months as the falls in food and energy prices drop out of the CPI calculations. However, with the renewed slide in oil prices, which have fallen 40% since the Bank’s November quarterly projections, the pick-up in inflation is expected to be more gradual than what was forecast in November.
Even when excluding the effects of lower energy prices, the Bank points to Sterling’s past appreciation and restrained domestic cost growth as reasons for core inflation remaining subdued. Another factor that has caused the MPC to turn dovish in recent months is the slower wage growth. Despite unemployment falling to 5.2%, average weekly earnings have moderated from 3% to 2.4% in the three months to October. A fall in the average number of hours worked may be one explanation for this.
For the months ahead, the Bank was more pessimistic in its outlook and judged the risks to both inflation and economic growth to be a little on the downside due to the developments in emerging market economies and in global financial markets. It downgraded its forecasts for GDP growth in Q4 2015 and Q1 2016 by 0.1% to 0.5% in each quarter. As for inflation, it is expected to accelerate slightly to around 0.5% in the coming months and remain at that level for some time.
Most economists now don’t expect the Bank of England to raise rates until the second half of 2016. If slow wage growth and low commodity prices persist for longer than expected, lift off may not arrive until 2017. However, sterling’s recent depreciation, which has fallen around 3% since the start of the year, may pose an upside risk to inflation in the medium term from higher import prices and offset some of the deflationary pressures.
The pound firmed against its major counterparts after the announcement as markets were surprised by the 8-1 vote and were expecting a unanimous vote. Sterling jumped to 1.4436 against the dollar on the news from an earlier intra-day low of 1.4359 dollars. It later eased to 1.4409 in afternoon European trading. Meanwhile, the euro fell from 1-year highs of around 0.76 pounds to 0.7558.
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