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Bank of England minutes add to signs rate hike on back burner

by International Commercial Investment on October 22, 2014

Source: Reuters

Most Bank of England policymakers are firmly against raising interest rates, seeing little evidence of inflation pressures while the slowing euro zone poses growing risks, minutes of their latest meeting showed.

The majority of the Bank’s rate-setters saw good reasons to keep rates at their record low of 0.5 percent at their Oct. 7-8 meeting, which was held even before signs emerged of deeper problems in Britain’s key exports markets in Europe.

Only two of the nine members of the Monetary Policy Committee voted to tighten monetary policy at the meeting, the third time in a row that the MPC has split.

Sterling fell against the dollar and the euro and British government bond prices rose briefly as investors added to bets that the BoE would raise rates only in the middle of next year.

That contrasts with expectations only a few months ago that rates might start to go up as soon as November as Britain’s economy recovered quickly from years of stagnation after the financial crisis.

Simon Peck, a gilts strategist at RBS, saw no sign of any other MPC members who might start voting for a rate hike.

“What we have seen is a validation of the current market assessment, that there will be moves later on in 2015,” he said.

Overnight interest rate futures fully priced in a rate rise by the time of the MPC’s August meeting, with a roughly 25 percent chance of a move in February, Peck added.

The minutes published on Wednesday showed the Bank now believed the amount of spare capacity in Britain’s economy was being reduced less quickly than it had previously expected.

In another sign the BoE was in no hurry to raise rates, most of the MPC’s members saw “few signs” of inflation pressures building, even taking into account how the stronger pound was lowering import prices, something that could prove temporary.

Pay growth was lower than needed for the Bank to meet its 2 percent inflation target and “further downside news in the euro area had increased the risks” to Britain’s economy, most of the MPC members felt.

SOME FEAR COST OF DELAYING RATE HIKE

On the other side of the debate, external members Martin Weale and Ian McCafferty voted to raise interest rates to 0.75 percent from 0.5 percent, as they did in August and September.

They said keeping rates at their record low could unbalance Britain’s economic recovery and that the lagged effect of interest rate rises meant an increase now was needed.

Weale and McCafferty are likely to be on their own for a while, unless they rejoin those voting to keep rates on hold.

Last week, the Bank’s chief economist, Andrew Haldane, said he favoured keeping interest rates on hold for the longer than previously thought, possibly until the middle of next year.

The MPC’s October meeting took place before financial markets were shocked by data that showed Germany’s economy was slowing more than expected, fanning fears about a euro zone recession. The MPC was aware of upcoming data that would show British inflation slowed sharply to 1.2 percent in September.

The BoE’s staff stuck to a forecast for third-quarter economic growth in Britain to be 0.9 percent.

Private economists expect a first reading of gross domestic product on Friday to show quarterly growth slowed to 0.7 percent in the July-September period from 0.9 percent between April and June as manufacturers took a hit from the slowdown in Europe.

The BoE’s forecast relates to the final version of GDP which has proven higher than preliminary readings in recent years.

International Commercial InvestmentBank of England minutes add to signs rate hike on back burner