MPC votes 8-1 to maintain Bank Rate as global risks continue

The MPC admitted that there remains a "range of views among MPC members about the balance of risks to inflation relative to the target".  At the Committee’s latest meeting, the majority of members judged that the current stance of monetary policy remained appropriate. However Ian McCafferty preferred to increase Bank Rate by 25 basis points, given his view that building domestic cost pressures would otherwise be likely to lead to inflation overshooting the target in the medium term.

The Committee voted unanimously to maintain the stock of purchased assets financed by the issuance of central bank reserves at £375 billion.

The MPC noted that while twelve-month CPI inflation rose slightly to 0.1% in July, it remains well below the 2% target rate. The MPC said that around three quarters of the gap between inflation and the target reflects unusually low contributions from energy, food, and other imported goods prices, with the remaining quarter reflecting the past weakness of domestic cost growth, and unit labour costs in particular. Although pay growth has recovered somewhat since the turn of the year, the recent increase in productivity means that the annual rate of growth in unit wage costs is currently around 1% – lower than would be consistent with meeting the inflation target in the medium term, were it to persist. 

In the Committee's August Inflation Report, the MPC maintained that the aim of returning inflation to the target within two years was likely to be achieved conditional upon Bank Rate following the gently rising path implied by the market yields prevailing at the time.

The Committee noted in the August Report that the risks to the growth outlook were skewed moderately to the downside, in part reflecting risks to activity in the euro area and China. Developments since then have increased the risks to prospects in China, as well as to other emerging economies. This led to markedly higher volatility in commodity prices and global financial markets.

The MPC confirmed that these developments have the potential to add to the global headwinds to UK growth and inflation.

Peter Cameron, Associate Fund Manager at EdenTree Investment Management, commented:

“The case for rate rises remains flimsy in the current environment. The UK’s exports are already struggling against the strength of Sterling, a problem that would be exacerbated by a rate rise. Hawks may point to wage growth finally showing signs of life but even this trend slipped into reverse last month and could slow further if the outlook for the global economy darkens. The Bank must measure the dangers of raising too early against the consequences of falling behind the curve. Perhaps smaller increments, 0.1% instead of 0.25%, could be considered as a way to signal intent without unnerving markets.”  

Paul Whitlock, Director of Savings, Charter Savings Bank, added:

“The optimism of an interest rate rise sooner rather than later lead to a brighter outlook for savers last month. However, today’s decision to hold has once again hit savers below the belt.

“Unprecedented volatility in Asian stocks and global economic instability continues to ruffle the markets’ feathers. It’s likely the UKs longsuffering savers will be waiting well into 2016 for better returns on their money. At this pace, the US Federal Reserve will increase interest rates well before any hawkish action from the Bank of England.”

Barry Naisbitt, Chief Economist at Santander, said:

"The Monetary Policy Committee once again decided to hold Bank Rate at 0.50% today. This came as no real surprise. With inflation still incredibly close to zero and various uncertainties taking centre stage, the MPC members were unlikely to change their view from last month when one MPC member voted to raise rates. Since then there has been considerable volatility in the world economy and financial markets. This will have been taken into account, as will the recent downbeat performance of manufacturing industry.  

"That said, if the economy turns out as the MPC expected it to a month ago, talk of higher interest rates is likely, as the Governor has noted, to return to prominence around the turn of the year. In the meantime, decisions will continue to be ‘data dependent’ and market attention will turn to the US Federal Reserve’s meeting next week for further information on how policy makers are viewing the economic scene."