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Bank of England volatility has extinguished any prospect of a rate rise in the near-future.on track for seven years of record low interest rates as global markets turmoil




Britain is on track for a seven-year anniversary of rock-bottom interest rates as the Bank of England today said that recent financial market volatility has extinguished any prospect of a rate rise in the near-future.


The continued collapse in the world oil price, which means lower inflation at home, and a slowdown in wage growth have also released pressures for a rise that were building last year.




BoE deputy governor Dame Nemat (Minouche) Shafik 


All but one of the members of the Bank’s nine-strong monetary policy committee that sets rates voted against a hike today, leaving the base rate at its historic low of 0.5 per cent where it has been since March 2009.

The MPC's lone hawk Ian McCafferty, who has been voting for a rise since August, stuck to his call for interest rates to rise by 0.25 per cent, despite rumours that he would rejoin the other policymakers.



"Balance of risks"

McCafferty voiced concern about how current risks to the economy are being weighed. Failing to judge them correctly could jeopardise the bank's future inflation targets, he said.

Federal Reserve 



If either the current level of slack is smaller, or the pace of future absorption somewhat faster than envisaged, then, given the lags involved, there is a risk that pay and unit cost growth will begin to rise fast than is consistent with our inflation target.

It takes some 18 to 24 months for the full effects of any change in interest rates to feed through to the economy.

So I am thinking not only about the coming wage round in 2015 but also the wage round in 2016 when considering inflationary pressures over the policy horizon.







BOE 


No rate rise: The Bank said it expected both inflation and economic activity to be ‘slightly weaker’ than expected at the time of November’s Inflation Report

But the Bank said in a statement that the economic outlook had changed since its report in November and that inflation was likely to rise at a slower pace than expected because of collapsing oil prices - effectively taking off pressure for a rate rise.

It said in a statement:  the 40% decline in dollar oil prices means that the increase in inflation is now expected to be slightly more gradual in the near term than forecast in the Committee’s November Inflation Report projections.


And added: ‘Since then, the data regarding international activity have evolved broadly as expected. Recent volatility in financial markets has underlined the downside risks to global growth, primarily emanating from emerging markets.

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‘Although the most recent declines in oil prices will depress global inflation in the near term, given they appear primarily to reflect developments on the supply side of the market, these conditions should in time provide net support to spending in the United Kingdom and its major trading partners.’

Inflation stood at 0.1 per cent in November and the Bank expects it to rise further in the coming months. However, it said the decline in oil price – which touched below $30 for the first time in 12 years - was going to slow down a rise in the cost of living.



Minutes of the meeting also showed the Bank believes UK growth has been weaker than it predicted in November. It lowered its outlook for gross domestic product growth in the fourth quarter of last year and first quarter of this year by 0.1 percentage points to 0.5 per cent in each quarter.





'Hawk': Ian McCafferty, who has been voting for a rise since August, stuck to his call for interest rates to rise by 0.25 per cent

The Bank said: ‘Continued quarterly growth at rates of around 0.5% were likely around the turn of the year, a little weaker than the near-term outlook described in the committee's November Inflation Report.



MPC's lone hawk Ian McCafferty

The MPC also highlighted that developments in the labour market were key to the medium-term inflation outlook, pointing to a mix of slowing earnings growth but robust employment growth.

It said that the relapse in earnings growth could be the consequence of a reduction in the number of hours being worked per week over the past year, a change in the mix of employment growth towards more lower-paid jobs and also low inflation leading to low pay awards.

Maike Currie, investment director for personal investing at Fidelity International, said the Bank seemed to adopt a ‘decidedly dovish stance’.

She said: ‘Slowing wage growth and benign inflation expectations mean there is very little pressure for the Bank to act anytime soon and it is entirely possible that interest rates will remain at 0.5% all year.




US: Today's MPC meeting was the first since the US Federal Reserve, chaired by Janet Yellen, chose to raise interest rates in December after its economy expanded strongly last year Martin Beck, senior economic advisor to the EY ITEM Club, said: 



'The UK economy’s exposure to the cloudy global outlook and a significantly more depressed picture for core inflation on this side of the Atlantic kept the Committee’s hand steady.

'The outcome of January’s meeting points firmly away from a majority of the MPC favouring a rate rise anytime soon. Notably, none of the three criteria for considering a rate rise as set out by the Governor in a speech in July last year – quarterly GDP growth in excess of 0.6%, a convincing pick-up in core inflation and a sustained rise in wage growth – are currently present.

'Therefore, we stick with our view that the first hike is most likely to come towards the end of the year. If anything the recent global financial turmoil emphasises that the risks are skewed towards a longer period of inaction.'   

The pound strengthened from a more than five-year low against the dollar, and an 11-month low against the Euro after the Bank of England minutes showed Ian McCafferty continued to vote for a rate hike.

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The pound was down 0.2 per cent against both the dollar and the euro, at $1.4389 and € 1.3221 respectively.

Andy Scott, economist at HiFX, said: ‘Today’s minutes signalled the MPC are more sanguine about the outlook for the UK economy than the market was expecting and may provide some respite for sterling in the days ahead.

‘In the current environment however, with investors becoming increasingly worried about the impact of the slowdown in China, concerns over the UK economy and the risk of a “Brexit” look likely to continue to haunt sterling.’ 

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