The Bank of England sent an unexpectedly dovish message to financial markets today as it said the falling oil price and the strength of the pound would keep inflation “muted” even as wages pick up and the economy continues to grow.
On what has been dubbed “Super Thursday” by the City because of the large simultaneous dump of information by Threadneedle Street, it emerged that only one member of the rate-setting Monetary Policy Committee, Ian McCafferty, voted to put up rates from their historic floor of 0.5 per cent. The City had expected at least two members of the nine person committee to vote for an immediate tightening of monetary policy.
However, the Bank did warn that it was possible the mortgage rates offered by banks could rise “shortly” because banks’ own funding costs have crept up since May.
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The pound fell 0.65 per cent against the dollar and 0.66 per cent against the euro on the news.
The pound pic.twitter.com/HdhEKiGAIx
— Joseph Weisenthal (@TheStalwart) August 6, 2015
The central bank said consumer price inflation this year would come in at 0.3 per cent, down from the 0.6 per cent expectation in May. CPI is currently zero and the Bank’s forecast suggests it could well turn negative again over the coming months.
"The falls in energy prices of the past few months will continue to bear down on inflation at least until the middle of next year” the Bank said. The price of a barrel of Brent crude is now around $55, 12 per cent lower than three months ago.
The Bank also added that the strength of sterling in trade-weighted terms – which has risen by 3.5 per cent since May – “will continue to push down on inflation for some time to come”.
Nevertheless, inflation in two years’ time is still seen returning to the Bank’s official 2 per cent target.
The Bank thinks growth in the third quarter of the year will come in at 0.7 per cent and it revised up its estimate for growth over 2015 as a whole from 2.5 to 2.8 per cent.
It sees average pay growing by 3 per cent this year, up from 2.5 per cent previously. Business investment is also seen rising by 4.75 per cent, up from the earlier 2.5 per cent growth.
However, employment the Bank has revised down its employment growth estimates for this year, resulting in a stronger productivity growth performance in 2015 than previously expected by Threadneedle Street.
The Bank said the central estimate of the MPC was that there remains slack of 0.5 per cent of GDP in the economy, unchanged since its report in May, although it stressed that there was a “range of views” on this subject on the committee.
The minutes report that Ian McCafferty thought that “demand and wage pressures were likely to be greater and the margin of spare capacity smaller”. Analysts had expected him to be joined by Martin Weale, who has voted for rate rises in the past.
