The drag on import prices from this appreciation will continue to push down on inflation for some time to come, posing a downside risk to its near-term path in particular.
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However, one member of the bank’s Monetary Policy Committee (MPC) – the body that sets interest rates – voted in favour of raising interest rates.
In the wider context, the BoE thinks the economy’s growth over 2015 as a whole will be nearer 2.8 per cent than its earlier 2.5 per cent forecast but the Bank has revised down its employment growth estimates for this year. “But once rates do start to rise, it should be done gradually to allow businesses to absorb costs and plan ahead”.
Although the proportion of the CPI’s components (excluding food and energy) showing positive inflation is now lower than during the decade between 1997 and 2007 (57 per cent compared with 67 per cent), developments more broadly do not point to a more general deflationary trend, wrote Mr Carney.
Conversely, the bank said private domestic demand is robust and expected to remain so. The vote according to the group was 8 for no change to the benchmark rate while 1 member called for a hike.
Morgan Stanley fixed income strategist Anthony O’Brien said sterling’s exchange rate against the dollar and the price of British government bonds were now particularly heavily influenced by market expectations for future Fed policy.
“There is a high bar right now to not acting”, Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, told the Wall Street Journal in an interview published on Tuesday, adding that it would take a “significant deterioration” in economic data to stop him from supporting a September rate increase.
The markets can rest assured there won’t be any rate hike at this meeting and in the past we would not know how the MPC had voted for another two weeks, but going forward those minutes and voting patterns will be released along with the decision.
He added that the economic recovery looked “well embedded and solid”, with the Bank expecting “steady growth over the next two years”. Nevertheless, any lingering expectations of a first rate hike occurring this year disappeared, driving investors to sell the currency.
Policymakers also made clear that they will be monitoring the health of the global economy closely. However, with the economy now recovering strongly and wages finally rising quickly, speculation is growing about when it might decide to start weaning Britain off low rates.
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The Bank’s decision also saw it opt to leave the scale of its money-printing quantitative easing programme unchanged at £375bn. Symmetric targets help to ensure that inflation expectations remain anchored and that monetary policy can play its role fully.
