At its meeting on 6 October, the Bank of England’s Monetary Policy Committee voted by a majority of 8-1 to maintain bank rate at 0.5 per cent.
It also, once again, voted unanimously to maintain the stock of purchased assets financed by the issuance of central bank reserves at £375bn.
A statement from the central bank read that with inflation at zero in August - well below the 2 per cent target - and the likelihood that at least some spare capacity remains in the economy, the MPC intends to set monetary policy to ensure that growth is sufficient to absorb any remaining underutilised resources.
“Around three-quarters of that deviation reflects unusually low contributions from energy, food and other imported goods prices,” the MPC stated, with the remaining quarter reflecting past weakness of domestic cost growth.
“Although rising, increases in labour costs remain lower than would be consistent with meeting the inflation target in the medium term, were they to persist at current rates.”
Core inflation remains subdued at around 1 per cent, influenced both by restrained labour cost growth and by muted import cost growth, itself partly reflecting the continuing dampening influence of sterling’s appreciation since the middle of 2013.
There remains a range of views among MPC members about how factors relevant for the outlook for inflation might evolve in future.
At the meeting this week, Ian McCafferty preferred to increase rates by 25 basis points, given his view that building domestic cost pressures were likely to come to outweigh the dampening influence of the appreciation of sterling, causing inflation to overshoot the 2 per cent target in the medium term.
However, all members agreed that the likely persistence of headwinds restraining economic growth following the financial crisis means that, when rate does begin to rise, it is expected to do so more gradually and to a lower level than in recent cycles.
Last month, BOE governor Mark Carney said continuing low rates may come to an end at the start of 2016, as a decision on whether to raise rates will come into “sharper relief” then, adding that the Chinese market crash in August increased downside risks, but would probably not have had a significant effect on the MPC’s thinking.
Other forecasters have put the rate rise further out, with the Centre for Economics and Business Research suggesting it will be next year before the rate moves up from its historic low and long level.
Russ Mould, investment director at AJ Bell, said that it seems unlikely that the BOE will move before the US Federal Reserve.
“The Fed and Bank of England both meet twice more this year, but the markets seem increasingly convinced the first rate rise will now come in spring 2016 at the earliest, giving borrowers further relief but pressuring savers and potentially forcing them to take more risk than they would like in the efforts to eke out some decent returns for their Isas and pension pots.”
peter.walker@ft.com
