Carney’s Majority Shows Cracks on Inflation Concerns: EconomyScott Hamilton
Bank of England policy makers voted 7-2 to keep the benchmark interest rate at a record low this month as some of the majority began to raise concerns about potential inflation pressures.
Minutes of the Monetary Policy Committee’s Nov. 5-6 meeting showed the majority in favor of maintaining the key rate at 0.5 percent -- which includes Governor Mark Carney -- had a “material spread of views on the balance of risks.” While some of those views were focused on the possibility of weaker U.K. growth, others cited the potential for a faster decline in excess capacity in the economy, boosting inflation.
“There was a risk that growth might soften further than anticipated” and premature tightening “would leave the economy vulnerable to shocks,” the MPC majority said. “Against this, however, there was also a risk that the degree of spare capacity would be eliminated more quickly than assumed,” which would “potentially result in inflation rising to, and subsequently overshooting, the 2 percent target.”
The minutes contrast somewhat with the downbeat assessment presented by Carney at the Nov. 12 Inflation Report press conference, when he cited “moribund” global expansion and stagnation in Europe. His comments, along with lower BOE forecasts, prompted investors and economists to change their view on the timing of the first interest-rate increase.
“There was a much greater sense of this spare capacity question hovering hawkishly over the MPC than the Inflation Report and recent speeches have suggested,” said Philip Rush, an economist at Nomura International Plc in London. “It would still leave a blocking majority of internal doves.”
The pound rose against the dollar after the minutes were published and was trading at $1.5679 as of 11:52 a.m. London time, up 0.3 percent from yesterday.
While the minutes today cited threats to the recovery from the euro area and the U.K. housing market, it said business investment growth was “buoyant” and there were signs that wage growth was picking up.
“Further increases in earnings growth would be necessary” if the BOE’s inflation projections were to be met, the central bank said. “But, given the pace at which spare capacity appeared to have been eroded over the past year and the possibility that productivity growth would remain weak, there was a risk that any remaining slack might soon be exhausted, causing inflationary pressures to build.”
Data yesterday showed inflation unexpectedly accelerated to 1.3 percent last month from 1.2 percent. While the BOE expects price growth to cool again in the coming months, Annual pay growth accelerated to 1 percent in the three months through September.
David Tinsley, an economist at UBS AG in London, said the minutes show that it’s “probably be wrong to put all the majority seven members of the MPC in the same boat.”
“The discussion in the committee on policy rates is a little more live than recent speeches might suggest,” he said. “Domestically the key indicator to watch is clearly pay growth, particularly that in the private sector.”
After the Inflation Report, economists were focused on the minority of Ian McCafferty and Martin Weale favoring higher interest rates, rather than a move within the majority. While most analysts forecast another 7-2 split being revealed today, some had said at least one of the minority would change his vote.
For Weale and McCafferty, economic circumstances continued to justify an immediate increase in the benchmark rate from 0.5 percent to 0.75 percent, according to the minutes. They said the MPC should anticipate labor-market pressures.