Bank of England signals rates can stay low as inflation weakness persists

The Bank of England's staff project gross domestic product expanded 0.6 per cent in the third quarter.
The Bank of England's staff project gross domestic product expanded 0.6 per cent in the third quarter. PHOTO: REUTERS

LONDON (BLOOMBERG) - Bank of England policy makers said the U.K. economy is withstanding international pressures, while also signaling they have room to keep interest rates at a record low as inflation weakness persists.

In the minutes of its October meeting, the Monetary Policy Committee weighed the risk of a further global slowdown against resilient domestic demand and consumer spending. The panel voted 8-1 to keep the key rate at 0.5 per cent, with Ian McCafferty maintaining his call for an increase.

"Although there remained a risk that emerging-market prospects might deteriorate further, there had so far been few signs of a material effect on business and consumer confidence in the advanced economies," it said.

The committee also said the near-term outlook for inflation had weakened since August and that price growth "now appeared likely to remain below 1 percent until Spring 2016." In the central bank's analysis, unit-labor costs aren't yet strong enough to push inflation back to its 2 percent target.

Inflation at zero, combined with an "easing in the pace of activity," may keep the MPC on a cautious footing as it judges when to begin removing the emergency stimulus it put in place during the financial crisis. In addition, some of the committee said that the lag between policy changes and their impact on inflation "appeared a bit shorter than previously thought." Slowdown Signs The MPC made its decision amid mounting signs that the economy is starting to lose momentum after 10 consecutive quarters of expansion. A report this week showed services grew at the weakest pace in more than two years, underscoring the case for keeping rates unchanged.

The BOE's staff project gross domestic product expanded 0.6 per cent in the third quarter, the minutes showed.

The nine-member MPC said there were "some differences" about the balance of risks to inflation in the medium term, with the debate centering on whether domestic or global factors take precedence. The central bank said will give a fuller analysis when it publishes its new forecasts in November.

Some economists have already changed their view on the BOE's likely rate path. Signs of a faltering expansion and the Federal Reserve's decision to delay its tightening prompted Bank of America Merrill Lynch, JPMorgan Chase and Royal Bank of Scotland to push back their forecasts for a U.K. rate increase.