Last week’s meeting of the Bank of England’s Monetary Policy Committee (MPC) concluded, in line with market expectations, for no changes to policy. The Bank rate was kept at 0.5%, where it has been since mid-2009.
However, the February edition of the Bank’s ‘Super Thursday’ — so called because the policy decision, meeting statement and minutes, inflation report, and press conference all happen on same day — did indicate an increased level of caution amongst members of the MPC.
For the first time in seven months, there was no vote for a rate increase, with the decision to leave rates unchanged unanimous.
It is clear from the minutes, as well as the Quarterly Inflation Report, that the MPC has become more concerned about developments in the global economy and financial markets and the potential risks that these could pose to the UK inflationary outlook.
The MPC made reference to the “muted growth in world prices”, and the dampening impact on import prices from the “appreciation of sterling” as accounting for the vast majority of the undershoot in inflation.
Bank of England governor Mark Carney noted in the press conference that the MPC’s current policy deliberations are taking place “amid sluggish global growth” and “turbulent financial markets”.
At the same time, the UK economy has slowed.
Quarter four GDP data released last week confirmed this, with the economy registering growth of 2.2% in 2015, down from the 2.9% recorded in 2014.
On a quarterly basis, though, growth picked up in the fourth quarter, increasing by 0.5% after the third quarter’s 0.4% reading.
However, the underlying data showed that growth remained unbalanced, with the services sector accounting for all of the rise in GDP.
The production and construction sectors subtracted slightly from GDP.
However, in terms of the labour market, there was a pick-up in job growth in the fourth quarter.
Employment rose by 267,000 in the three months to November, compared to 140,000 in the previous three months.
The unemployment rate fell to 5.1% in November, its lowest rate since January 2006.
Despite the further fall in unemployment, the pace of year-on-year growth in average weekly earnings has continued to slow.
The ex-bonus measure came in at 1.9% in November, having been as high as 2.9% as recently as July.
Meantime, CPI inflation remained very weak in December, coming in at just 0.2%.
Not surprisingly then, against this macro backdrop, the forecasts in February’s inflation report incorporated some downgrades.
The Bank of England anticipates CPI inflation to average just 0.8% this year.
It sees inflation at 1.9% in 2017. Meanwhile, it sees the economy growing at 2.2% this year and 2.3% in 2017.
It also lowered its wage inflation forecasts. It now projects average weekly earnings to be around 3% by the end of this year.
Governor Carney said that the Bank of England’s objective of returning inflation to target will require “balancing the protracted drag from sterling’s past appreciation and lower commodity prices with expected increases in domestic cost growth”.
In the near term, the MPC “judges the risks to inflation lie to the downside”, reflecting the possibility that wage pressure might “take a little longer to build following a period of low inflation”.
Overall, these various updates from the Bank of England reinforce the view the MPC is in no hurry to hike interest rates, with the chances of a rate hike this year now very much lower.
Indeed, financial markets have grown increasingly confident in recent months that the first UK rate hike is a long way off.
They now expect Bank of England rates to remain unchanged for all of 2016 and 2017.
Futures contracts are not now envisaging a full 25 basis point rate hike until the first half of 2018, at the earliest.
However, this may be too doveish. Governor Carney commented that CPI inflation is likely to exceed its 2% target at the “two year point” and that the MPC “judges that it is more likely than not that the Bank Rate will need to rise” over this forecast period.
John Fahey is senior economist at AIB.
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