Bank of England policy makers said the U.K. economy is withstanding international pressures, while also signaling they have room to keep the benchmark rate at a record low as inflation weakness persists.
In the minutes of its October meeting, the Monetary Policy Committee weighed the risks of a further global slowdown against resilient domestic demand and consumer spending. The panel voted 8-1 to keep the key rate at 0.5 percent, with Ian McCafferty maintaining his call for an increase.
“Although there remained a risk that emerging-market prospects might deteriorate further, there had so far been few signs of a material effect on business and consumer confidence in the advanced economies,” it said.
The near-term outlook for inflation had weakened since August, the committee said, and price growth “now appeared likely to remain below 1 percent until Spring 2016.” In the central bank’s analysis, unit-labor costs aren’t yet strong enough to push inflation back to its 2 percent target.
Inflation at zero, combined with an “easing in the pace of activity,” may keep the MPC on a cautious footing as it judges when to begin removing the emergency stimulus it put in place during the financial crisis. Investors haven’t priced in a rate increase until late 2016.
Inflation Lag
In addition, some of the committee said there’s some evidence that the lag between policy changes and their impact on inflation “appeared a bit shorter than previously thought.” That suggests those members may not see a need for a strong preemptive response to any signs of inflation pressure.
The pound erased and advance against the dollar and was little changed at $1.5314 at 12:14 p.m. London time. It depreciated 0.5 percent to 73.73 pence per euro.
The MPC made its decision amid mounting signs that the economy is starting to lose momentum after 10 consecutive quarters of expansion. A report this week showed services grew at the weakest pace in more than two years, underscoring the case for keeping rates unchanged.
The BOE’s staff project gross domestic product expanded 0.6 percent in the third quarter, the minutes showed.
The nine-member MPC said there were “some differences” over the balance of risks to inflation in the medium term, with the debate centering on whether domestic or global factors take precedence. The central bank said will give a fuller analysis when it publishes its new forecasts in November.
Some economists have already changed their view on the BOE’s likely rate path. Signs of a faltering expansion and the Federal Reserve’s decision to delay its own tightening prompted Bank of America Merrill Lynch, JPMorgan Chase and Royal Bank of Scotland to push back their forecasts for a U.K. rate increase.
source: Bloomberg
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