The Bank of England will be in no mood to lift interest rates any time soon as it said today there was a high chance that inflation will remain near zero in the coming months due to a renewed fall in oil prices.
The Bank’s monetary policy committee (MPC) also warned about uncertainty over the market reaction if the US Federal Reserve lifted interest rates next week. The MPC voted eight to one to keep interest rates at a record low of 0.5 per cent.
The Bank maintained its view from last month that inflation would not exceed one per cent until the second half of next year. Over summer it said inflation would exceed one per cent early in 2016, but moved the prediction to spring a few months later. It then shifted the forecast to the second half of next year last month. Inflation was minus 0.1 per cent in October and is forecast by the Bank to have been slightly positive in November.
While the Bank warned oil prices could hinder the return of inflation to more normal levels over the next few months, it also said the market reaction to the US Federal Reserve lifting interest rates for the first time in nine years would be difficult to predict. It also warned: “The downside risks to growth in emerging market economies remained, however, with the risk of an acceleration of capital outflows in reaction to any increase in US interest rates.”
Another major factor is the strength of the pound, which is keeping imported goods cheap. It noted that the strength of the pound had dropped in response to the European Central Bank’s decision to ease this month – the easing undershot expectations – but was around the same value as in November. The pound has strengthened against the euro over the past 18 months, rising from a value of €1.25 to €1.38.
Ian McCafferty was the sole dissenter. He said the risks to domestic cost growth to the upside, and were sufficient to justify an immediate increase in Bank rate. The MPCs voting pattern has not changed since the summer.
Most of the committee said there was a downside risk to the Bank’s inflation forecast, which predicts inflation will slightly exceed the two per cent target in two years if Bank rate follows the path implied by market expectations.
The Bank also noted that nominal pay growth, the amount workers are paid in cash not adjusted for inflation, had flattened recently. The MPC views nominal earnings growth as an important indicator of future inflation.