Bank of England (BOE) officials said low oil prices and subdued wage growth will keep a lid on inflation as they left their key rate at a record low.
In the minutes of its December meeting, the Monetary Policy Committee (MPC) weighed “robust growth” in domestic spending against weak overseas demand, and said eight of the nine-member panel voted to leave the benchmark at 0.5 percent this month. Ian McCafferty maintained his call for a 25 basis-point increase.
“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 price of oil had fallen markedly again, increasing the likelihood that headline inflation rates would remain subdued, and nominal-wage growth had leveled off.”
Inflation stayed below zero for a second month in October and recent economic data has been mixed, giving the BOE room to maintain its emergency policy settings for now. While the minutes said there was “no mechanical link” between the BOE decision and those of other central banks, it is caught between a European Central Bank that’s adding stimulus and a Federal Reserve that may be just a week away from the first increase in its key rate since 2006.
The MPC said prospects for international and domestic activity hadn’t changed that much since the November meeting and noted that “the more material news on the month had been in costs.”
Last month the central bank noted that falling commodity prices and an increase in the pound were damping prospects for inflation. Since then oil has fallen further, with Brent crude dropping below $40 a barrel this week. A trade-weighted measure of the pound has jumped almost 6 percent in the past year.
Returning inflation to target “depends on an increase in domestic cost growth sufficient to balance the drag on prices from very subdued global inflation and past increases in the value of sterling,” the minutes said.
Overall, the balance between growth in pay and productivity is “a key aspect” of the MPC’s policy assessment, the minutes showed.
Inflation may turn positive in November, officials said, however “core inflation remains subdued.”
Economists predict the panel will keep the key rate unchanged until well into next year. Investors are betting the rate will stay unchanged through 2016, according to forward contracts based on the sterling overnight index average, or Sonia.
Thursday’s policy summary said the bank intends to bring inflation back to its target “without an overshoot once persistent disinflationary forces ultimately wane,” echoing a line from its November statement.
McCafferty voted for an increase for a fifth consecutive month. He thought the “risks around domestic cost growth were to the upside and were sufficient to justify an immediate increase,” the minutes said.