BoE Vote Unanimous, Holds Rate, Low Inflation Forces Vote Switch

Bank of England policy maker Ian McCafferty dropped his call for an interest-rate increase as officials cut their growth and inflation forecasts and signalled borrowing costs will stay low.

The Monetary Policy Committee led by Governor Mark Carney left the benchmark at a record-low 0.5 percent, as the nine-member panel voted unanimously for the first time since July last year. The February decision was published in London alongside new economic projections showing inflation will remain below 1 percent until the end of the year.

“The MPC judges the risks to the central projection to be skewed a little to the downside in the near term, reflecting the possibility of greater persistence of low inflation,” the committee said on Thursday. “Low realized inflation will continue to moderate the increase in wage pressure in the near term.”

The bleaker outlook reflects policy makers’ concerns about the international picture, with officials saying emerging-markets are likely to grow “more slowly than in recent years” and risks to the world economy “lie to the downside.”

Officials made their judgements against a backdrop of a renewed slide in oil, a rout in global equities and commodities, volatility stemming from China’s slowdown and uncertainty about Britain’s upcoming vote on its European Union membership.
That’s combined to push bets on the timing of a rate increase back to 2018. While the report suggests a rate increase is still some way off, the MPC forecast shows inflation rising above their 2 percent target in two years and officials said a rate increase was “more likely than not” over the three-year forecast period.

Subdued Outlook

Officials see inflation, which was 0.2 percent in December, at 1.2 percent in the first quarter of next year, down from a projection of 1.5 percent in November. Price growth is forecast to gradually pickup after that, reaching 2.1 percent in the first quarter of 2018 and 2.2 percent a year later.

Wage growth was also revised down, with the MPC seeing pay of 3 percent this year, compared with a 3.75 percent forecast in November.

It also lowered its growth expectations, predicting an expansion of 2.2 percent this year, down from 2.5 percent in November. In 2017, the MPC sees growth of 2.4 percent and 2.5 percent in 2018.

The BOE’s forecasts were based on 25 basis-point rate increase in the second half of 2017 and the benchmark reaching 1 percent in the third quarter of 2018.

McCafferty had voted for a 25 basis-point increase between August and January. The majority of economists in a Bloomberg survey had expected him to maintain his call this month.

“For one member, the more prolonged period of low inflation suggested that the pickup in the pace of wage growth would be initially more muted than previously expected,” the minutes of the February meeting showed. “With the upside risks to inflation therefore more likely to emerge somewhat later, an immediate tightening in monetary policy was no longer necessary.”

Forex heatmap

Bloomberg

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell