BOE Signals Rate Can Stay Low as Inflation Weakness Persists

  • MPC votes 8-1 to keep benchmark at record-low 0.5 percent
  • Sees slow consumer-price gains, CPI below 1% until spring 2016

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Bank of England policy makers said the U.K. economy is withstanding international pressures, while also signaling they have room to keep the benchmark rate at a record low as inflation weakness persists.

In the minutes of its October meeting, the Monetary Policy Committee weighed risks of a further global slowdown against resilient domestic demand and consumer spending. It said the near-term outlook for inflation had weakened since August and price growth will probably stay below 1 percent until spring 2016. Officials voted 8-1 to keep the key rate at 0.5 percent, with Ian McCafferty maintaining his call for an increase.

Inflation at zero, combined with an “easing in the pace of activity,” may keep the MPC on a cautious footing as it judges when to begin removing the emergency stimulus it put in place during the financial crisis. Investors haven’t priced in a rate increase until late 2016 and short-sterling futures rose after the minutes were released, indicating traders were taking off bets for higher rates.

In the central bank’s analysis, unit-labor costs aren’t yet strong enough to push inflation back to its 2 percent target. While official statistics put the annual increase in unit labor costs at 2.2 percent in the second quarter, the central bank said the underlying figure may be much weaker.

“It was slightly more dovish than expected,” said Simon Wells,  an economist at HSBC Holdings Plc in London. “But what they gave with one hand, they took away with the other in terms of highlighting skill shortages, spare capacity and rising wage pressures.”

Weighing Risks

Differences existed on the MPC over the balance of risks to inflation in the medium term, with the debate centering on whether domestic or global factors will take precedence, the minutes showed. The central bank said it will give a fuller analysis when it publishes its new forecasts in November.

In addition, some on the committee said there’s evidence that the lag between policy changes and their impact on inflation “appeared a bit shorter than previously thought.” That suggests those members may not see a need for a strong preemptive response to any signs of inflation pressure.

The pound erased gains and fell against the dollar, trading at $1.5275 as of 2:54 p.m. London time, down 0.3 percent. It depreciated 0.4 percent to 73.64 pence per euro.

The MPC made its decision amid mounting signs that the economy is starting to lose momentum after 10 consecutive quarters of expansion. A report this week showed services grew at the weakest pace in more than two years. The BOE’s staff project gross domestic product expanded 0.6 percent in the third quarter, the minutes showed.

“A deterioration in the global demand environment would slow the pace of expansion further,” the minutes said. “The committee will continue to monitor international developments, as well as evidence concerning the resilience of the domestic economy, to assess the outlook for inflation and activity.”

The MPC made its decision on Tuesday, a day earlier than usual, to allow officials including Governor Mark Carney time to fly to Lima, Peru, for the annual International Monetary Fund and World Bank meetings this week. Carney and IMF Managing Director Christine Lagarde will speak on a panel about the global economy at 1 p.m. local time Thursday.

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