Bank of England keeps interest rates on hold in unanimous vote

The Bank of England voted to keep rates on hold at their record low of 0.5%

Bank of England Governor Mark Carney (REUTERS/Frank Augstein/pool)

The last hawk on the Bank of England’s Monetary Policy Committee flew the nest today as the Bank sent out another strong signal that UK interest rates will remain rooted to the floor into 2017 thanks to collapsing oil prices, tepid global growth and meagre pay rises.

Ian McCafferty, who had previously been the sole member of the nine-person MPC in favour of an immediate hike in the cost of borrowing, dramatically changed his mind and voted along with the rest of his colleagues to keep rates on hold at their record low of 0.5 per cent. The minutes of this week’s MPC meeting indicate Mr McCafferty now thinks wage growth will not pick up as strongly, making an immediate rate hike “no longer necessary”.

The Bank slashed its inflation forecast for the first quarter of next year to 1.2 per cent year on year, down from the 1.5 per cent expected in November. Consumer price inflation in December was just 0.2 per cent. The Bank still expects CPI to return to its official 2 per cent target in early 2018, but added that risks to its latest forecast were “skewed a little to the downside in the near term”.

The sell-offs in global equity markets this month and the rush by investors into safer assets have prompted traders to push their bets on the timing of the first rate rise from the Bank all the way out to the middle of 2018. At the end of last year the market betting had been on a rise in the middle of 2017.

The MPC said it was “more likely than not” the next move in rates would be up. But there has been growing speculation of the possibility of a rate cut if the economic outlook takes a turn for the worst.

In his open letter to the Chancellor today explaining why inflation is so far below target the Bank’s Governor, Mark Carney, stressed, once again, that if such downside risks did materialise the MPC could cut rates “further towards zero”. Several other central banks, including the European Central Bank, have been forced to push rates into negative territory.

The Bank says a combination of the renewed lurch down in global oil prices, the persistent strength of sterling since 2013 and weak domestic wage growth were primarily responsible for domestic inflation being so far below target.

The MPC said wage growth has been “weaker than anticipated” back in November and suggested low consumer price inflation “may have made lower nominal wages more acceptable” to employees, even while the labour market is getting tighter. The committee added it was “watchful” for signs low inflation might be creating a damaging deflationary wage spiral.

The Bank now expects average weekly earnings this year to grow by just 3 per cent, down from the 3.75 per cent expected in November. Wage growth next year has also been revised down by 0.25 percentage points to 3.75 per cent.

The Bank expects overall GDP growth this year to come in at 2.2 per cent, down from the 2.5 per cent it expected in November. Growth for 2017 was also revised down from 2.7 per cent to 2.4 per cent. The Bank said growth in the UK’s trade partners in emerging market economies, such as China, would be only “modest” with downside risks.

In contrast with the dovish thrust of much of the latest round of forecasts the MPC did say that spare capacity in the domestic economy was now almost entirely used up and that what remained was likely to be eliminated “during the course of the year”. In the past members of the MPC have suggested that rates would rise before slack is entirely gone.

In a similar vein, the Bank said the unemployment rate was currently around its long-run equilibrium level of around 5 per cent, implying a tight labour market that would eventually put upward pressure on wages. But it added there was “considerable uncertainty” around this judgement.