As movements in commodity prices had pushed CPI inflation towards zero, the MPC raised concerns that inflation could remain persistently below the target. For one member, the lower near-term outlook for CPI inflation meant that the risk of price and wage expectations falling further remained a significant consideration.
The Bank of England's inflation report, released today, shows that inflation is expected to remain close to zero, before rising around the turn of the year. It admitted that there remains "considerable uncertainty" around inflation returning to its 2% target. The Bank of England has forecast Bank Rate to rise from early 2016 before reaching 1.7% by 2018 Q3.
There were a range of views on the costs and benefits of moving policy sooner or waiting longer. On the one hand, moving earlier would allow a more gradual path for interest rates. Yet, in an environment of heightened uncertainty, the benefits of waiting for more information about the strength of the economy would be greater than usual.
The majority of MPC members judged it appropriate to leave the stance of monetary policy unchanged at present. Ian McCafferty preferred to increase Bank Rate by 25 basis points, given his view that demand growth and wage pressures were likely to be greater, and the margin of spare capacity smaller, than embodied in the Committee’s collective August projections.
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.
The Committee also voted unanimously to maintain the stock of purchased assets financed by the issuance of central bank reserves at £375 billion, and so to reinvest the £16.9 billion of cash flows associated with the redemption of the September 2015 gilt held in the Asset Purchase Facility.
Brian Murphy, Head of Lending at Mortgage Advice Bureau, commented:
“With a dissenter emerging in the ranks for the first time this year, today is another milestone in the long and protracted farewell to the 0.5% base rate. It is no surprise to see a split re-emerge as the MPC lays the ground for a historic rise. It seems inevitable that we are nearing the point where the overall state of the economy will benefit from being gradually weaned off the record low base rate.
“It takes little encouragement for the winds to change in the mortgage market, and there are signs that some price cuts have already been reversed – even though the base rate hasn’t moved an inch. Lenders have been chasing customers all year with attractive headline rates, but the time will come when borrowers have to make more of the running to secure the best deals before they disappear out of sight.
“Nevertheless, with just one MPC member voting for a rise, there is less prospect of low-cost loans disappearing overnight than might have been the case. It’s also important to remember the first rate rise when it comes will only be a small increase that shouldn’t have a major impact on most people’s household finances. Recent borrowers have already had their incomes thoroughly stress tested in preparation, so the biggest impact will be on those who haven’t reassessed their loan commitments for some time and may never have known the effects of a rate rise."
Mark Harris, chief executive of mortgage broker SPF Private Clients, added:
"When it comes to forecasting the next interest rate rise, the markets have been consistently wrong for the past five years. Given that the recovery is still finely balanced, the enormous level of debt and lack of any real reason why interest rates should go up in the near future, we wouldn’t be surprised if rates didn’t go up until 2017, rather than next year.
"However, base rate doesn’t have to rise for lenders to hike mortgage pricing with several lenders raising fixed rates in the past week on the back of rising Swaps. That said, there are still plenty of excellent rates available and historically mortgage rates remain extremely competitive. Lenders have plenty of capacity to lend so they are likely to continue to offer tempting deals to attract borrowers but we have probably seen the very cheapest of the rates.
"History shows us that most borrowers wait until rates are actually rising before making a move to remortgage. It is only when the mortgage becomes more expensive that it becomes ‘real’, with some borrowers waiting until the second or even the third rate increase before looking to remortgage. Of course, by that point fixed rates will be much more expensive than they are now.
"Borrowers can take some comfort from the hints that when rates do start rising they are likely to do so slowly, settling around the 2 to 2.5 per cent level. However, in today’s minutes the MPC said this was an ‘expectation, not a promise’ with the ‘actual path Bank Rate will follow over the next few years [depending] on the economic circumstances’. All borrowers can do therefore is act according to their own particular circumstances and to plan ahead."
