The Bank of England have agreed to keep interest rates at a record low of 0.5%. This came after a retreat by two members of the Bank’s flagship Monetary Policy Committee (MPC), Ian McCafferty and Martin Weale, who had originally been calling for a rise since August 2014.
Their change of heart is the result of a recognition that if the BoE were to oversee a rise in interest rates at present, it would increase the chance that low inflation would persist in the longer term. As a result, experts have predicted that interest rates will not change in 2015, meaning that this government will have overseen an entire term of office with the base rate at a historical low.
An analyst at IG, Alastiar McCaig, in response to this news, stated that “any expectation that rates might rise in 2015 has now been quashed”, going on to predict that an increase in the first or second quarters of next year are “much more likely timeframes.”
Ben Brettell, an eminent economist at the investment company Hargreaves Lansdown, corroborated this viewpoint, remarking that the unanimous vote meant “a significant shift in the expected path for interest rates” and that a rise in the near future “looks extremely unlikely.”
The MPC stated: “It was possible that the risks to CPI inflation in the medium run might have, if anything, shifted to the upside, but all members were also alert to the downside risk of current low inflation becoming entrenched.” The suggestion was that this fall in inflation was due to temporary issues yet there was a chance it may last longer than expected.
In the minutes of the MPC’s January meeting, it is publicized that the BoE believe there to be a “roughly even chance” that inflation, plummeting to 0.5% in December, could fall further to below zero in the first six months of 2015. This would likely the result of a decline in oil prices and a supermarket price war.
However, the committee went on to state that the lower price of oil worldwide may act as a “stimulus” to economic growth in the UK, as well as its “main trading partners via its effect on the costs of production and real incomes.” The BoE acknowledged the unclear nature of inflation in the future and stated their commitment to oversee a full assessment in the Inflation Report due to be released next month.
In addition to oil prices, which have plunged nearly 60% since last June, the MPC spoke to their supervision of pay growth and exchange rates. The minutes of the MPC included the statement that “sustained pay growth, at rates materially higher than in recent years, would be required to be consistent with the 2% inflation target in the medium term.”
In a separate report from the Office for National Statistics, it was shown that in the quarter through November, pay growth was at it fastest for more than two years. The specific figures show that wages excluding bonuses increased by 1.8% from a year before and that unemployment dropped to 5.8%, the lowest in the last six years.