As in August and September, Weale and McCafferty voted for a 25bp rate hike at the October MPC meeting, but the majority of MPC members was still firm (7-2) for unchanged rates. We continue to look for the first rate hike in Q2 2015.
Martin Weale and Ian McCafferty, both external members of the MPC, called for rates to rise to 0.75% in response to lower unemployment and a tightening labour market, but they were again outvoted by the seven other members of the committee, who seemed more concerned about the impact of the weak Euro area economy on Britain’s recovery.
For the MPC majority, there remained few signs of inflationary pressure in the UK economy. ”In particular, unit labour costs had fallen over the past year. Pay growth, which was likely to remain subdued in the public sector, was lower than was consistent with meeting the inflation target in the medium term. While the economy had been growing sufficiently quickly to absorb some of the slack in the economy, there were some signs that the pace of growth was beginning to ease. The housing market appeared to be cooling with house price growth slowing to a more sustainable pace. Further downside news in the euro area had increased the risks to the durability of the UK expansion in the medium term,” the minutes said.
BoE Chief Economist Haldane said last week that the international growth outlook and a lack of domestic inflation have left him “gloomier,” underscoring the case for the BoE to take time before raising interest rates.
While the CPI data were released after the MPC’s October meeting, the committee might have known that CPI inflation fell to just 1.2% in September, the lowest level in five years. Lower inflation has obviously bolstered the majority’s case for rates to remain low for longer. With the recent sharp fall in oil prices CPI inflation might dip below 1% later this year – a rate that would force BoE Governor Carney to write his first letter to the chancellor, George Osborne, explaining why inflation is more than 1% point away from its 2% target.
Because of the lack of inflationary pressures we continue to look for the first rate hike in Q2 2015.
The decision to keep the Asset Purchase Facility unchanged remained unanimous in October.
Nordea