BoE’s MPC Decision: Downside inflation risks could cause delays to rate hike

The rate setters noted “existing uncertainties mostly referring to the global environment, primarily the uncertain reaction of market participants to an expected increase of interest rate by the Fed and its impact on commodities and financial markets”, the bank said in the statement. In other words, healthy job growth is squeezing the slack out of the labor market.

The rate decision was in line with market expectations as experts predicted the rate freeze on the back of modest recovery in private consumption and the expected rate hike in the United States.

The inflation outlook could, however, be adversely affected by any unanticipated large increase in administered prices and government levies as well as worldwide oil and food prices beyond current forecasts.

British consumers are spending, but by not quite as much – shopping down 0.4 per cent on a like-for-like basis in November.

Inflation was below zero for the second month during October and recent data on the economy remains mixed giving the BOE some room to maintain its policy setting for the time being, said London analysts.

“All members agree that, given the likely persistence of the headwinds weighing on the economy, when Bank Rate does begin to rise, it is expected to do so more gradually and to a lower level than in recent cycles, ” said a Bank of England spokesperson. At the same time, policy makers have has tried to avoid the risk of triggering a selloff of Serbian assets by reducing borrowing costs too quickly.

So next year could very well be a tug of war between FED and BOE, over who hikes first, since BOE hike expectation is pushed back to 2017 or very late next year.

The effective or average fed funds rate has remained in the range of 0.10 per cent to 0.15 per cent thus far this year. “The trend should be toward at least 6-3 by now”.

Jessica Hinds, a European economist at Capital Economics, said she still think that further interest rate rises will be needed in 2016.

The lowest core PCE forecasts also fell over the same period, particularly for the third and fourth quarters of next year, to 0.9 percent and 1.0 percent, respectively, from 1.4 percent in earlier polls.

The MPC commented that in order to return to their 2% inflation target, there is a need to see an increase in domestic cost growth sufficient to balance the drag from the subdued global inflation and past increase in the Sterling.

Alongside the decision we’ll also get the minutes and voting from the meeting which provides additional insight into just how close policy makers are to raising rates and what may now be standing in their way.