Bank of England policymakers voted unanimously to leave borrowing costs on hold this month, the minutes reveal, but with the eurozone economy picking up, two members of the monetary policy committee saw the decision as “finely balanced”.
News that two anti-inflation “hawks” – likely to be Martin Weale and Ian McCafferty, who voted for higher rates through late 2014 – are again contemplating a rate rise, led City analysts to suggest the MPC is inching towards tightening policy.
“Overall, the only way is up for interest rates – but not yet. The tone from the MPC seems to be taking baby steps in the hawkish direction,” said Alan Clarke, of Scotiabank.
The improvement in the outlook for the eurozone economies appeared to be a key factor influencing the MPC’s thinking. “Although it was too early to be confident, a succession of firmer data suggested that growth in the euro-area economy was picking up, supported by a confluence of factors – improving credit conditions, a recovery in confidence, a lower oil price, accommodative monetary policy and a weaker currency,” the minutes said.
With inflation falling to zero in February after the plunge in global oil prices, the minutes also acknowledged that the Bank governor, Mark Carney, would be forced to write a second open letter to the chancellor, explaining why inflation has dropped more than one percentage point below the 2% target.
Divergence in views among MPC members has been aired publicly in recent months, with the Bank’s chief economist, Andy Haldane, arguing in a speech that interest rates might even have to be cut to zero to prevent deflation.
Haldane argued that wage growth – and therefore inflation – might be weaker than expected because of structural changes in the labour market.
Wednesday’s minutes of the policy meeting held on 8 and 9 April, underlined the fact that there was a “wide range of views” about the future path of interest rates.
But while the MPC rehearsed the arguments about weak wage growth, saying the pattern had been shared across G7 countries and might relate to shifts in the workforce towards younger and less qualified workers, the minutes also declare “this effect was unlikely to persist”.
The MPC said it would take stock of the state of the labour market and the amount of slack in the economy in the runup to the publication of its next quarterly inflation report on 13 May.
But Simon Wells, UK economist at HSBC, said even if the Bank’s analysis suggested inflation is poised to take off, the MPC was unlikely to make any major decisions over the next month with the possibility of coalition negotiations looming.
“Coming so soon after the election and with a significant chance that the new government would not yet be known, the MPC may not want to do anything that triggers market volatility in the May report,” he said.
This article was written by Heather Stewart, for theguardian.com on Wednesday 22nd April 2015 12.32 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010