The MPC minutes from the 3-4 December show that seven of the MPC members voted for keeping the rates unchanged. As expected, still two of the members, Weale and McCafferty, voted for a 25bp rate hike.
The minutes stated that “In the near time, CPI inflation was expected to dip below 1% probably in December data. The expected near term profile of inflation was somewhat weaker than had been assumed at the time of the November Inflation Report because of the further reduction in sterling oil prices”. Thus, there is a clear risk that inflation might persist below the target for longer than expected.
On the other hand, the minutes also stated that “Recent signs of pickup in wage growth were promising”, but “further increase in pay growth, as labour market slack continued to decline, would be required to be consistent with the 2% inflation target in the medium term”. There was also a risk that the degree of spare capacity could be eliminated more quickly than previously assumed.
As before, the MPC members are split on these risks and thereby on the inflation outlook. However, for most members the outlook for inflation in the medium term justifies maintaining the current stance of monetary policy. The Committee voted unanimously to keep the issuance of central bank reserves at £375 billion.
Our forecast is that the BoE will start to hike rates in June 2015. However, given the weak inflation outlook there is a risk that a first rate hike would come later.
Nordea