The Bank of England has kept interest rates on hold this month, noting volatility in global markets and highlighting a sharp fall in oil prices that is likely to keep inflation low.
Members of the Bank’s nine-member monetary policy committee (MPC) voted eight to one to leave rates at 0.5%, where they have been since March 2009, in a repeat of recent votes. Sticking to his recent stance, only Ian McCafferty voted for a rise to 0.75%.
Minutes from the policy-setting meeting showed the MPC believed “the outlook was similar to how it had appeared” when the Bank’s latest economic forecasts were published in November. But the minutes also noted volatility on financial markets, and in share prices in particular, “that appeared linked to concerns about the underlying strength of the Chinese economy”.
“Recent volatility in financial markets has underlined the downside risks to global growth, primarily emanating from emerging markets,” the minutes said.
The MPC highlighted a 40% fall in the oil price since November, which implied the increase in inflation that policymakers had been expecting around the turn of the year “would probably be a little more modest than previously assumed”. The Bank said cheaper oil would “depress global inflation in the near term” but would also provide some support to spending in the UK and its big trading partners.
Oil prices have slumped on the back of a supply glut and waning demand as the global economy slows. On Wednesday, Brent crude dipped below $30 a barrel for the first time in nearly 12 years. World stock markets have also had a tumultuous start to 2016, falling as fears intensify over the economic outlook.
Several analysts have warned in recent days that the global economy could suffer a repeat of the 2008 crash if the knock-on effects of a contraction in Chinese output pushes down commodity prices further and prompts panic selling on stock and bond markets.
Those concerns, cheaper oil and signs of a slowdown in the UK economy, including news this week of a broad-based downturn in Britain’s industrial sector, have prompted traders to push back their expectations for an interest rate rise. Most economists do not expect a move till the second half of this year or later. Some say uncertainty about the outcome of a planned referendum on the UK’s EU membership, to take place this year or next, may also stay the Bank’s hand.
Commenting after the Bank decision, the Royal London Asset Management economist Ian Kernohan said: “The recent decline in the oil price will have played a part in the MPC’s thinking, not so much because they see it as a signal of poor global growth prospects, but because it will keep inflation lower in 2016 than they would have expected a few months ago.
“There will be no interest rate hike ahead of the Brexit referendum, however, given the uncertainties which the vote is already creating.”
The minutes from the Bank meeting said UK economic growth around the turn of the year would probably turn out to be a little weaker than the MPC had predicted in November when it released the quarterly inflation report forecasts.
The Bank will update those forecasts in early February and should provide more details on how it views global growth prospects, cheaper oil and the domestic labour market affecting inflation.
The Investec economist Chris Hare said: “The MPC held back on revealing too many bottom lines on how its thinking is evolving – a more conclusive steer should be revealed at the next inflation report on 4 February.” Investec has shifted its forecast for a rate rise from the second quarter of this year to the final quarter.
Similar to December’s meeting, policymakers noted a slowdown in wage growth and the committee said it had discussed how labour costs might be affected by the slightly weaker economic outlook painted by recent indicators.
The committee also commented on the relatively calm market reaction to the decision by the US Federal Reserve in December to raise interest rates for the first time in almost a decade. The MPC noted that the US rate rise had been met with a positive reaction in US equity markets and a muted immediate reaction in other financial markets.