BOE Becomes Unanimous on Holding Rates as Inflation Sinks – Bloomberg

The two Bank of England policy makers pushing for an interest-rate increase dropped their call this month, leaving the bank unanimous in its decision to hold rates as inflation risks falling below zero. The pound declined.

The nine-member Monetary Policy Committee led by Governor Mark Carney forecast that U.K. inflation may drop to zero in the first quarter and there's a "roughly equal chance" it could go below that level. Policy "could and would be adjusted" if needed to meet the 2 percent price target.

"The fall in near-term inflation might become more persistent if it lowered inflation expectations, pay and other cost growth in a way that became self-perpetuating," minutes of the Jan. 7-8 meeting published today showed. There was a risk of "inflation persisting below the target for longer than previously expected."

The MPC's heightened concerns on below-target inflation, now at 0.5 percent, are being echoed in the euro area, where European Central Bank policy makers may launch a new round of stimulus tomorrow. In its analysis today, the BOE said euro-area downside risks have increased.

The pound weakened after the minutes, even as separate data showed the unemployment rate fell more than expected to 5.8 percent. Sterling declined 0.2 percent to $ 1.5115 at 10 a.m. in London.

For Martin Weale and Ian McCafferty, who had been voting for a quarter-point rate increase since August, the decision had become "finely balanced." While the inflation drop was probably temporary, they noted the risk that it might persist and said a rate increase now was no longer appropriate.

The MPC said the plunge in U.K. inflation may affect wage settlements, most of which conclude in the first half of the year.

"It was therefore possible that the pace of nominal wage growth would be weaker than otherwise and that this would feed into lower subsequent price inflation," the minutes said. "In addition, the continued decline in oil prices was likely to contribute to a reduction in capital investment in the U.K. oil industry."

Still, lower oil prices, "if sustained," would act as a stimulus to growth in the U.K. and its main trading partners because of the impact on production costs and real incomes. Signs of a pickup in private weekly earnings growth may also suggest less slack in the economy than previously thought, the minutes said.

Pay growth accelerated to its fastest in more than two years in the quarter through November, the Office for National Statistics said in a separate report today. Wages excluding bonuses grew 1.8 percent from a year earlier, while unemployment fell to 5.8 percent, a six-year low. Economists had forecast a decline to 5.9 percent, according to a Bloomberg News survey.

The MPC has held its key rate at 0.5 percent even after the economy fully recovered output lost during the recession. For about a year, officials have said borrowing-cost increases, when they begin, will be "limited and gradual" to avoid undermining the economy.

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net Emma Ross-Thomas, Eddie Buckle

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