21 Jan 2015
BOE committee uncertain about the medium term outlook for inflation – TDS
FXStreet (Barcelona) - The TD Securities Research Team comments on today’s MPC minutes, and note that the 9-0 vote consensus to keep rates unchanged indicates that there is a lot of uncertainty in the committee regarding the medium-term outlook for inflation.
Key Quotes
“Today’s MPC Minutes surprised with a 9-0 vote for rates to remain on hold with Weale and McCafferty no longer favouring an immediate rate rise. There seems to be a lot of uncertainty on the Committee about where inflation goes in the medium term, as that will be what ultimately drives BoE policy.”
“The near-term profile is obviously weaker, and the BoE has pegged it as 50-50 whether inflation dips below zero in H1 (which is in line with our tracking too, with CPI right on the cusp through the spring). But for the medium term, there are arguments on both sides.”
“On the dovish side, there's concern about inflation expectations and if low inflation gets imbedded in wage setting. There's also concern about the drop in oil prices leading to reduced capital investment, plus more downside risks from the Eurozone. But on the upside there's the stimulus from lower energy prices, rising real wages, and stimulus from lower rates, plus the recovery we're already seeing in nominal wages.”
“On balance, "It was possible that the risks to CPI inflation in the medium term might have, if anything, shifted to the upside, but all members were also alert to the downside risk of current low inflation becoming entrenched." Weale and McCafferty "noted the risk that low inflation might persist for longer than the temporary factors implied and concluded that this risk would be increased by an increase in Bank Rate at the current juncture”."
Key Quotes
“Today’s MPC Minutes surprised with a 9-0 vote for rates to remain on hold with Weale and McCafferty no longer favouring an immediate rate rise. There seems to be a lot of uncertainty on the Committee about where inflation goes in the medium term, as that will be what ultimately drives BoE policy.”
“The near-term profile is obviously weaker, and the BoE has pegged it as 50-50 whether inflation dips below zero in H1 (which is in line with our tracking too, with CPI right on the cusp through the spring). But for the medium term, there are arguments on both sides.”
“On the dovish side, there's concern about inflation expectations and if low inflation gets imbedded in wage setting. There's also concern about the drop in oil prices leading to reduced capital investment, plus more downside risks from the Eurozone. But on the upside there's the stimulus from lower energy prices, rising real wages, and stimulus from lower rates, plus the recovery we're already seeing in nominal wages.”
“On balance, "It was possible that the risks to CPI inflation in the medium term might have, if anything, shifted to the upside, but all members were also alert to the downside risk of current low inflation becoming entrenched." Weale and McCafferty "noted the risk that low inflation might persist for longer than the temporary factors implied and concluded that this risk would be increased by an increase in Bank Rate at the current juncture”."