BoE kept rates unchanged at 0.5%, flags oil price & wage growth concerns

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 10, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Mumbai) - The Bank of England's rate-setters voted 8-1 again to keep interest rates at their record low of 0.5 per cent in line with expectation. As expected Ian McCafferty, a member in the nine-person MPC, voted to increase rates to 0.75 per cent. The monetary policy statement mentioned UK policy stance is determined by UK inflation outlook.

    Headline inflation to stay below 1 per cent in H1 2016. Domestic cost pressures will have to firm substantially to return inflation to 2% target in around 2 years. The monetary policy statement also stressed on a renewed fall in global oil prices as well a slower wage growth.

    The minutes of the Bank's latest policy meeting stated its expectation that softer spending cuts announced by Chancellor George Osborne in November would give a boost to growth in 2016.

    It is also evident from the meeting that the central bank is in no rush to follow the U.S. Fed in raising rates. There is "no mechanical link" between the Bank's thinking and that of other central banks.

    Plunge in oil to keep inflation subdued

    Inflation in UK remains below zero. The central bank has opted to keep rates at record low level so that demand can be stimulated which will in turn lead to consumer spending and a rise in price eventually. Governor Mark Carney noted that the price of oil had "fallen markedly again", after their last meeting. This, according to the governor has raised the risk of inflation staying subdued. Carney had previously said that rate hike was very much on the cards unless outlook worsened due to surprise downturns like plunge in oil prices.

    Flattened pay growth leaves BoE worried

    The minutes flagged worries of wage growth levelling. Wage growth is a primary factor which guides the central bank on when to raise rates. "Despite lower unemployment, nominal pay growth appears to have flattened off recently," the minutes said. The wage growth slowdown could have resulted from fewer working hours. It is also possible that employers are offering lower wage deals because of low inflation.

    Carney says BoE will move when time is right

    The BoE’s earlier short-term inflation forecast prompted investors to push back their expectation of rate hike timing to late 2016 and 2017. Economists polled by Reuters expect the BoE to begin raising rates in the second quarter of 2016.

    BoE Governor Mark Carney had hinted earlier that decision on the probable time when BoE will raise rates will come into "sharper relief" around the turn of 2015. He however has now said that the central bank will move when the time is right.

    Brexit axe looms

    Britain's planned referendum on its membership of the European Union is due. Prime Minister David Cameron plans to hold the referendum before the end of 2017. Economists hold there exists a lot of uncertainty over the vote's result. On the event of Brexit business sentiment in UK could be badly hurt and this will likely pose serious threat to Britain's economy in 2016. The central bank will thus have to keep the Brexit consideration in mind while deciding on monetary policy stance.
    For more information, read our latest forex news.

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