Falling oil prices and worries about a possible Chinese slowdown mean rates will stay low until 2017
The Bank of England has voted to keep interest rates on hold over fears that Britain’s economy remains vulnerable amid a fall in oil prices and a slowdown in China.
The nine-strong Monetary Policy Committee (MPC), which decides on UK interest rates, voted eight to one to keep rates at a historic low of 0.5pc. The committee’s decision came as oil prices continued to plummet and concerns over the strength of the global economy have yet again come to the fore.
Officials said financial market volatility had “underlined the downside risks to global growth, primarily emanating from emerging markets”. Worries about China’s flagging growth rate and stock market turmoil in the People’s Republic led the FTSE to its worst start to the year in 16 years this month.
Recent declines in oil are expected to weigh on inflation, keeping it well below the Bank’s 2pc target. “The 40pc decline in oil prices means that the increase in inflation is now expected to be slightly more gradual,” the minutes said.
Both analysts and investors have pushed back their forecasts for rate rises into 2017 in recent weeks as the likelihood of an inflationary bounce has declined.
However, over time, the lower price of oil should act as an effective tax cut for UK consumers, the MPC agreed. It said cheaper energy should provide “support to spending in the UK and its major trading partners”.
The Bank also downgraded its assessment of the health of the UK economy, warning it was “slightly weaker” than expected.
Accordingly, staff expect GDP growth will be 0.1 percentage point weaker at 0.5pc in the last quarter of 2015, and in the first three months of the year. The MPC also noted that pay growth had slowed down, a decline that had become “significantly more pronounced” than anticipated.
Ian McCafferty was the only member of the MPC to call for higher rates, voting to raise them by 0.25 percentage points this month. His vote this January marked a sixth straight month of voting for increasing rates.
He argued that the risks to inflation “remained to the upside”, and that an immediate rise in rates would allow for a more gradual path of rate increases.
However, Liz Martins, an HSBC economist, said that Mr McCafferty would “have a hard time convincing his colleagues” that inflation is poised to overshoot the Bank’s 2pc target.
“The minutes suggest the MPC is likely to revise down its inflation and wage growth forecasts in the February Inflation Report, and growth forecasts could well come down too,” she said.
While European Central Bank is divided
Minutes of the European Central Bank’s December meeting have revealed that eurozone policymakers were divided on how much economic stimulus was needed to support flagging growth in the currency union.
Some members had favoured a 0.2 percentage point cut to interest rates last month. However, in the event, the ECB reduced its rates by just a tenth of a point to minus 0.3pc.
Combined with a smaller than expected boost to the central bank’s quantitative easing scheme, the small stimulus package failed to impress investors, causing stocks to slide.
Some ECB officials had said that deeper rate cuts would have had a “strengthening” effect on the economy. But they were outvoted by their colleagues, who argued that sharper cuts could end up “increasing side effects over time”.
The smaller cut opted for was viewed “as unlikely to trigger material negative side effects and was also seen as having the advantage of leaving some room for further downward adjustments, should the need arise,” the minutes said.
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