Sterling dips as BoE worries over wages, oil

Interest rates on short-term Treasury bills climbed in Monday’s auction as investors anticipate an interest rate increase by the Federal Reserve next week.

This month’s meeting of the Bank’s nine-strong Monetary Policy Committee (MPC) comes at a time when the economy still faces some challenges. The actual path Bank Rate will follow over the next few years will depend on the economic circumstance.

The Bank maintained its view from last month that inflation would not exceed one per cent until the second half of next year.

Ian McCafferty was the lone voice wanting an increase in Bank Rate by 25 basis points.

The base rate was left unchanged at 0.5% and the level of asset purchases unchanged at GBP 375 billion.

Last month the central bank noted that falling commodity prices and an increase in the pound were damping prospects for inflation. Fed Bank of St. Louis President James Bullard said he expects inflation to start rising toward the central bank’s 2% goal as the energy shock fades.

“Despite lower unemployment, nominal pay growth appears to have flattened off recently”, the minutes said.

Thursday’s policy summary said the bank intends to bring inflation back to its target “without an overshoot once persistent disinflationary forces ultimately wane”, echoing a line from its November statement. BoE Governor Mark Carney and his colleagues have said they want to see more of a pick-up in British wages before they start to think about moving more quickly toward a rate hike.

“Clearly there’s going to be some pre-pricing of a move in rates this week”, said Dominic Bunning, a strategist with HSBC in London.

Francois Cabau, a Barclays analyst, said that the minutes “confirmed that a Bank rate hike is off the table in the short term, and as long as economic data do not pick up”. These developments may “increase the likelihood that headline inflation rates would remain subdued”, according to the minutes.

There has also been a drop over the same period in the most aggressive core PCE inflation forecasts, particularly for the first quarter of 2016, where the highest forecast has tumbled to 1.8 percent from 2.5 percent.

The dinar, which has lost over 1 percent against the euro since November 2, mainly on seasonal demand for the European currency and anticipation of Fed tightening, was largely steady after the rate decision, trading at 122.2 to the euro at 1110 GMT.