Bank of England expects low inflation to continue

Bank Of England Building

A strong pound has increased the chance of a prolonged period of very low inflation, leaving the Bank of England in no hurry to raise interest rates, its senior policymakers suggested.

The Bank’s rate-setting monetary policy committee said stronger growth prospects for the UK and a €1.1tn quantitative easing programme in the eurozone could push the pound higher.

UK inflation is at an-all time low of 0.3% and is expected to turn negative in the coming months for the first time in more than half a century. Mark Carney, the Bank’s governor, has insisted this will not amount to a period of dangerous deflation, where prices falls become entrenched.

However, minutes of the March MPC meeting showed members are now concerned that a persistently strong pound could keep inflation well below the Bank’s 2% target for a prolonged period.

The MPC noted: “Though monetary policy at home and abroad was only one of the many factors that influenced the exchange rate, especially in the near term, there was a risk that divergent monetary policy trends, as well as stronger prospects for growth in the United Kingdom than in the euro area, might continue to put upward pressure on the sterling exchange rate.

“This had the potential to prolong the period for which CPI inflation would remain below the target and exacerbate the risk that lower expectations of inflation might become more persistent.”

Persistently low inflation would lessen the likelihood of a rise in interest rates, which have been on hold at 0.5% for six years.

James Knightley, economist at ING, said: “The tone of the minutes suggest that the Bank of England is in no hurry to raise rates.”

Economists are betting the first increase in rates is most likely in the first half of 2016.

The MPC concluded: “The persistence of ... headwinds, together with the legacy of the financial crisis, meant that Bank rate was expected to remain below average historical levels for some time to come.

“There was a range of views over the most likely path of Bank rate in future, but all members agreed that it was more likely than not that Bank rate would increase over the next three years.”

The nine-strong committee voted unanimously in favour of leaving rates on hold at 0.5% and QE unchanged at £375bn. However, it noted the decision was “finely balanced” for two members, suggesting the MPC’s two former dissenters, Martin Weale and Ian McCafferty, were not far off voting for a rate increase.

The March decision marked the sixth anniversary of record low rates and the unprecedented introduction of QE.

The MPC suggested there were elements of concern in the second estimate of fourth-quarter GDP, which showed business investment fell at the fastest rate in almost six years.

“The expenditure breakdown of GDP growth in 2014 Q4 had given some pause for thought. But there were reasons to remain confident that the continued expansion envisaged in the Committee’s February projections was broadly on track.”

Powered by Guardian.co.ukThis article was written by Angela Monaghan, for theguardian.com on Wednesday 18th March 2015 11.35 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010

 

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