The Bank of England has left interest rates at their record low of 0.25% but repeated a warning that higher inflation and slower wage growth risk squeezing household budgets and spending next year. The Bank’s nine-strong monetary policy committee voted unanimously to keep rates on hold and maintain the current programme of electronic money printing known as quantitative easing. Policymakers had cut rates and expanded QE back in August to shore up confidence in the wake of June’s vote to leave the EU. In minutes to its final meeting of the year, the MPC said it would continue to trade off the effects of a weaker pound raising inflation against the prospects of economic growth and employment slowing. For now, policymakers said they saw no need to change policy as little had appeared to change since the MPC published its forecasts for the economy in November’s inflation report. “A slowdown in growth remained likely, but there had been little news since the time of the November inflation report about domestic activity and, although the near-term global outlook had improved, this was counterbalanced by more elevated risks,” the minutes said. The pound fell after the minutes said inflation may not rise as quickly as it expected in the near-term. “Since the Committee’s previous meeting, sterling’s trade-weighted exchange rate has appreciated by over 6%, while dollar oil prices have risen by 14%. All else equal, this would result in a slightly lower path for inflation than envisaged in the November inflation report, though it is still likely to overshoot the target later in 2017 and through 2018,” the minutes said.
The minutes also highlighted a “notable decline in consumer confidence” and signs of businesses being nervous about the longer-term. They repeated a forecast for unemployment to rise next year and for inflation to overtake pay growth “marginally” in 2017. There were early warning signs on Thursday that higher prices are forcing some people to cut back. Official figures showed retail sales continued to grow in November but at a markedly slower pace as fuel sales slowed amid higher pump prices. The MPC also reiterated its previous stance that it was ready to make monetary policy tighter or looser depending on how the economy evolves as the Brexit process gets under way. “Monetary policy could respond, in either direction, to changes to the economic outlook as they unfolded to ensure a sustainable return of inflation to the 2% target.” Ian Shepherdson, chief economist at the consultancy Pantheon Macroeconomics said the minutes’ reiteration that the Bank was ready to move in either direction reflected “great uncertainty ahead” and he expected the MPC to continue to hold borrowing costs for many months to come, rather than reacting to higher inflation with a rate rise. “Growth is expected to slow and the MPC’s base case remains that higher inflation will not become embedded into wages and inflation expectations – some measures of which have risen, they noted – so the Bank can continue to look through the inflation spike. We think Bank Rate will be on hold throughout 2017.”
Inflation picked up last month but was still well below the target at 1.2%. Because inflation was more than a percentage point off target at 0.9% in October, the Bank’s governor had to write an open letter to chancellor Philip Hammond. His exchange of letters with Hammond was published alongside Thursday’s minutes. Carney told the chancellor inflation would soon pick up on higher import costs. City economists had not expected a move in either direction on interest rates after a series of speeches from policymakers had suggested they will be in wait-and-see mode on the economy for some time to come, weighing up signs of rising inflation against indications that business confidence has faltered. The Bank is forecasting a slowdown in economic growth next year and a pick up in inflation, as the pound’s weakness since the referendum raises the cost of imports to the UK.