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MONEY

Bank of England keeps interest rates unchanged

The Bank of England has kept interest rates on hold this month amid expectations that inflation will remain low after another sharp fall in the oil price and a levelling off in wage growth.

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 voting numbers seen in recent months. Sticking to his recent stance, only Ian McCafferty voted for a rise to 0.75%.

Minutes from the Bank’s policy-setting meeting showed the MPC thought little had changed in terms of domestic demand or international activity since its last decision was published in November along with economic forecasts.

The “more material news” in the latest month had been on costs, the minutes said. “The price of oil had fallen markedly again, increasing the likelihood that headline inflation rates would remain subdued, and nominal wage growth had levelled off,” said the minutes.

The MPC said the chancellor’s autumn statement, when George Osborne set out a softer path for spending cuts than expected, might alter the outlook for the UK economy in 2016.

“The measures announced in the government’s autumn statement might reduce the drag on demand in 2016 compared with previous plans, but the full effects, particularly of measures relating to the housing market, would require more analysis to gauge,” the minutes said.

The Bank noted recent stimulus measures by its counterpart in the eurozone, the European Central Bank, to shore up the recovery there. It also noted growing expectations that the US Federal Reserve would move in the other direction and start raising interest rates at its policy meeting next week. For the UK, the MPC again sought to rebuff a market view that it would look to the US Fed for direction.

“There was no mechanical link between UK policy and those of other central banks, and the UK policy stance would be determined ultimately by the inflation outlook here,” the minutes said.

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On McCafferty’s reasons for again voting for a small interest rate rise, the minutes cited a view that “the risks around domestic cost growth were to the upside”. He also believed starting now to get interest rates back towards more normal levels would mean that future increases in borrowing costs could be more gradual.

Most economists expect the Bank of England to raise interest rates in the second quarter of 2016, and many see other MPC members soon joining McCafferty in voting for increases. But markets are not pricing in a move until around August.

Inflation was negative for a second consecutive month in October, according to the latest official figures, and it has been well below the Bank’s 2% throughout this year. The Bank’s latest concerns about inflation follow another sharp fall in oil prices this week.

Source: https://www.theguardian.com

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