“With flat prices in the United Kingdom and slowing global growth, we don’t expect any interest rate changes until well into 2016”. The actual path Bank Rate will follow over the next few years will depend on the economic circumstance.
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“Though the likelihood of a tightening in policy by USA policymakers is widely expected, the market reaction to any decision by the Federal Reserve to increase interest rates remains hard to predict”, according to the minutes.
“There would need to be a sustained firming in domestic cost pressures, compared with current rates”, to push inflation back to the 2 percent target, officials said.
The Committee said it would examine that particular issue in greater detail in February but it also cited a “drag” on annual pay growth from shifts in employment towards younger, less experienced workers. A continuing concern is the number of those in work who want to work more hours than are now available to them.
It might also be a reflection of employers offering lower wage deals because of low inflation, something the Bank has said previously said could hurt Britain’s recovery. The central bank’s benchmark repo rate, is set at 7.5 per cent. Some market participants refer to the repo rate derisively as the “politicians’ rate”, as it does not reflect the true cost of borrowing.
Consumer price inflation rose from 0.9% the month before to 1.0% in November, due mainly to a narrowing of the scale of decline in petroleum product prices and to expansions in the extents of increase in service fees.
“Expectations at the start of this year were calling for higher wages, inflation and interest rates”, said Neil Jones, the London-based head of hedge-fund sales at Mizuho Bank. But a top BoE official later warned investors against reading too much into the Bank’s projections when it came to assessing the outlook for rates. “In this process it will closely monitor external risk factors such as any changes in the US Federal Reserve’s monetary policy or in economic conditions in emerging market countries including China, the movements of capital flows, and the trend of increase in household debt”.
As for the timing of a hike: many economists see it later next year.
James Knightley, economist at ING, said the minutes suggests the MPC is “in little hurry to raise rates”. Another reason for the Bank to be cautious is Britain’s planned referendum on its membership of the European Union.
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Prime Minister David Cameron has said he plans to hold the referendum before the end of 2017. It cut interest rates by a cumulative 350 basis points through October to stoke inflation that has remained below its target range since February 2014.
