FXStreet (Mumbai) – The Bank of England decided to keep its key interest rate at a record low of 0.5 per cent at its January meeting, matching market expectations. The MOC members voted 8-1 to keep rates unchanged. Inflation remains at 0.1 per cent, way well below the official 2 per cent target and thus the MPC members thought it was best to not raise rates at this juncture.
Eight of nine MOC members felt keeping rates unchanged would “best balance the risks” to the economy and inflation. Ian McCafferty continued to be the lone hawk. He voted in favour of a 25 basis-point increase.
The drop in oil prices to multi year lows have kept prices in check. Crude prices have fallen to near $30 a barrel and this will hinder inflationary pressure from rising in the short term. It also implies tough times ahead for UK’s energy sector. However, there may be some benefits of low oil price. The MPC memebers would like to believe that fall in oil price would lift spending in the U.K., thereby supporting prices. “Although the most recent declines in oil prices will depress global inflation in the near term … these conditions should in time provide net support to spending in the United Kingdom and its major trading partners,” the Bank said in its minutes.
MPC memebers have also noted that the recent market volatility underlines the downside risks to the global economy. Global equities last week dropped the most in more than four years. FTSE-100 Index is noted to have fallen more than 6 per cent in the two weeks of 2016.
The BoE has not shown any inclination in following its US counterpart with respect to raising rates. Bank of England Governor Mark Carney has firmly said the America’s rate decision is “not decisive” for U.K. policymakers.
The minutes of the BoE’s January meeting published today shows the MPC expects inflation to be “a little more modest than previously assumed”. BoE has flagged concerns over weak inflation and economic growth outlook. The central bank also stated that weakening of sterling since November 2015 have raised the possibility of a ‘lower drag on inflation through import prices.’
Chris Williamson, chief economist at data firm Markit remarked “UK inflation remained largely absent in November, and looks set to remain weaker for longer than forecasters have recently been expecting”. BoE chief economist, Andy Haldane, warned that the economy and inflation were “skewed materially to the downside.”
The business surveys also indicate slower growth pace. Growth and inflation both remain at dis satisfactory levels. Pay growth, the central bank pointed out remained “restrained”. Latest figures show wage growth slowed to 2.4 per cent in the three months to October from 3 per cent recorded earlier. It grew at a slowest pace since early 2015 in this period. Only higher wages can lift consumer spending and help to stabilize price. The weaker outlook for inflation together with the slowdown in wages will likely compel the central bank to postpone rate hike to the end of 2016 or even beginning of 2017. Growth estimates for the last quarter and this quarter has been revised to 0.5 per cent.
U.K. policy makers have kept rates at record low level of 0.5 per cent for almost seven years now. BoE chief economist Andy Haldane had said in September that negative rates may still be needed in the coming months. Governor Carney clarified that the central bank will move when the time is right. Markets broadly expect BoE to start raising rates in January or February 2017. Six banks including Goldman Sachs Group Inc., Bank of America-Merrill Lynch and JPMorgan Chase & Co. pushed their forecasts on the timing of the first rate hike to the fourth quarter of 2016. Most economists polled by Reuters expect the central bank to raise interest rates in the third quarter of 2016.
The pound strengthened slightly against the dollar post the announcement of the BoE’s decision to hold rates. It however dropped back soon after. It was noted to be trading 0.1 per cent down as compared to yesterday, at $1.4390 as of 12:04 p.m. London time.
(Market News Provided by FXstreet)