The Bank of England went into self-imposed purdah when the election was called in late March, so the release of the minutes of the April meeting of the monetary policy committee provides the first hint of current thinking inside Threadneedle Street for some weeks.
The message from the minutes is modestly hawkish. Sure, the vote to leave borrowing costs at 0.5% was unanimous. True, there is no immediate prospect of interest rates being raised after polling day and for some months thereafter.
That’s because the current inflation rate is zero and, according to the Bank, could go negative during the spring. Given that the Bank has a legal duty to hit a 2% inflation target, it is not possible to raise rates in that sort of climate. Shortly before the Bank entered purdah – the period between an election being called and its result – its chief economist, Andy Haldane, made the point that the next move in rates could be down rather than up.
There was little sign of that in the minutes though. The MPC believes the fall in inflation has been primarily caused by the sharp drop in oil prices in the second half of 2014 and will prove temporary. It sees signs of life in the eurozone economy and thinks the US will shake off its winter blues.
Bank of England decision to keep 0.5% interest rate was unanimous. What’s more, the committee’s collective view is that it will not be possible for the economy to continue rattling along at its current rate and with the dole queues continuing to shrink without generating higher wage and price inflation, unless productivity starts to pick up markedly.
Two MPC members – presumably Ian McCafferty and Martin Weale (who were voting for a rate rise last year) – said the interest rate decision was finely balanced. All nine agreed it was more likely than not that official interest rates would rise over the next three years.
The fact that the minutes sound more hawkish does not mean that the Bank will act more hawkishly. In recent years, the Bank has consistently predicted a pickup in wage pressure that simply has not materialised.
Threadneedle Street has been remarkably slow to wise up to the possibility that the weakness in earnings has been caused by structural rather than temporary factors. This failure explains why there has been a disconnect between Bank forecasts and Bank action. It also explains why the minutes should come with a health warning.