Inflation as measured by the Consumer Prices Index (CPI) stood at -0.1% in October and the rate-setters predicted it would be slightly positive in November.
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Sterling edged down on Friday, a day after the Bank of England voted to keep interest rates at their record lows and said nothing to bring forward expectations that United Kingdom rates will not rise until late next year.
Indeed, the BoE argues not to over-estimate the recent rises in wage growth as inflationary driver; on the contrary, it points towards additional downside risks to the expected moderate recovery of inflation over the coming months, due to renewed lower oil prices.
Mario Draghi, president of the European Central Bank, last week announced a cut to overnight deposit rates from minus 0.2 per cent to minus 0.3 per cent and extended a 60 billion euro (£43bn) stimulus programme by six months.
“The Fed’s criteria for ending zero interest rate policy and raising the federal funds rate for the first time since July 2006 appear to be satisfied”, said Robert Dye, chief economist for Comerica Bank.
The Bank said in last month’s forecast that inflation would stay below 1% until the second half of 2016.
As he has done since August, Ian McCafferty, an external member of the MPC, voted to increase rates to 0.75 percent but all eight of his colleagues favored keeping them on hold. The minutes show that “As in previous months, there was a range of views among Committee members about the outlook for activity and inflation, and therefore the balance of risks around the inflation target in the medium-term”.
Fed watchers think it boils down to three steps: hike interest rates in December, hit the pause button in January and then react to what develops – which would set the stage for another increase as early as March 16.
“The short-term impact is always negative with rate hikes on the rest of the emerging markets, including China, and that still seems to be the case”, said Nicholas Yeo, head of China and Hong Kong equities at Aberdeen Asset Management, which manages $429.7 billion.
21 of 24 economists polled by Reuters expect the Reserve Bank will cut the official cash rate by a quarter point to 2.5 percent with its monetary policy statement on Thursday.
The pound fell after the release, and traded down 0.4 percent at $1.5126 at 12:43 p.m. London time.
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For the majority of officials at the BOE, the outlook for growth and inflation in the United Kingdom doesn’t yet justify an increase in the central bank’s benchmark rate. If it does keep the rate unchanged, any gain in the kiwi may be limited by the prospects of a Fed hike next week, traders said.
