The prospect of a UK interest rate rise receded further into the distance after the Bank of England voted unanimously to keep borrowing costs at their record low and cut its forecasts for growth, wages and inflation.
The Bank flagged the recent sharp sell-off in global stock markets and investors’ jitters about a slowdown in China as it revealed that policymaker Ian McCafferty dropped his recent call for a rate rise.
He had voted against the eight other members of the Monetary Policy Committee (MPC) since last August but this month agreed with his colleagues that it was too soon to raise interest rates from 0.5%, where they have been for almost seven years.
Wage growth has been weaker than the MPC had been expecting and minutes to its latest policy meeting suggested it was cautious about predicting any significant pick-up in pay over coming months.
“Against that backdrop, all members of the committee thought that maintaining the current stance of policy was appropriate at this meeting,” the minutes said.
Then presumably referring to McCafferty, they added: “For one member, the more prolonged period of low inflation suggested that the pickup in the pace of wage growth would be initially more muted than previously expected; with the upside risks to inflation therefore likely to emerge somewhat later, an immediate tightening in monetary policy was no longer necessary.”
Amid turmoil on financial markets, a sharp fall in oil prices and gloomier prospects for growth in many big economies, investors have been pushing back the chances of a rate rise in the UK. Financial markets were recently pricing in a small chance of a cut in borrowing costs this year.
The latest message from the Bank was that in practice rates were more likely to go up than down, although the Bank governor, Mark Carney, has recognised that cutting rates is an option for policymakers in theory.
“The committee judged it more likely than not that Bank Rate would need to increase over the forecast period to ensure inflation remained likely to return to the target in a sustainable fashion,” the minutes said.
The Bank’s quarterly forecasts for inflation and growth published alongside the latest decision also noted that wage growth had been weaker than expected and so headline inflation was recovering more slowly than expected.
The MPC is now forecasting GDP growth of 2.2% this year, down from 2.5% previously. The outlook for 2017 growth was cut to 2.4% from 2.7%.
Inflation is now forecast at 0.4% in the first quarter of this year, down from 0.7% pencilled in previously.
Inflation has been close to zero for a year as global commodity prices have tumbled – at 0.2% in December it was well below the Bank’s target of 2%, measured on the consumer prices index (CPI).
“The scale of recent commodity price falls means that CPI inflation is likely to remain below 1% until the end of the year,” the inflation report said.
Policymakers noted signs that wage negotiations were being affected by low inflation, with employers perhaps less generous and workers being less demanding given they were enjoying a boost to household budgets from cheaper fuel and food.
The MPC predicted that as headline inflation picked up, nominal wage growth would “in all likelihood” increase – albeit, probably at a slower pace than the committee had previously expected.
However, the MPC was cautious about predicting a pick-up this year, saying there were downside risks to such a view.
“The committee remained watchful for signs that low inflation was having more persistent second round effects on wages,” said the minutes.
As economists had largely predicted, the Bank appeared to send a message to financial markets that they were pricing in an interest rate rise a little too far into the future. Were interest rates to follow the path implied by markets inflation was “likely to exceed the 2% target slightly at the two-year point and then rise further above it,” the inflation report said.
But the MPC also noted that its central projection for inflation had shifted down from the last forecasts published in November and that risks were to the downside in the near-term at least “reflecting the possibility of greater persistence of low inflation”.
The Bank also highlighted a gloomier outlook for the global economy.
Following Chancellor George Osborne’s warning last month that 2016 had begun with a dangerous “cocktail” of risks from the global economy, the Bank too highlighted a shaky global backdrop. Its quarterly inflation report said that while the UK domestic economy looked resilient, emerging market economies were likely to grow more slowly than in recent years and global growth would be “only modest”.
With such “headwinds” in mind, the MPC reiterated that when the Bank rate does start to rise, “it is expected to do so more gradually and to a lower level than in recent cycles”.
This article was written by Katie Allen, for theguardian.com on Thursday 4th February 2016 12.14 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010