The MPC said that domestic cost growth over the past year has been below that necessary for inflation to return sustainably to the 2% target, but its pace is expected to increase over time.
Twelve-month CPI inflation rose to 0.1% in November and the MPC said this is likely to rise modestly further in the coming months as some of the large falls in energy and food prices a year earlier drop out of the annual comparison. But the 40% decline in dollar oil prices means that the increase in inflation is now expected to be slightly more gradual in the near term than forecast in the Committee’s November Inflation Report projections.
Core inflation also remains relatively subdued – a consequence of the past appreciation of sterling, weak global inflation and restrained domestic cost growth.
At the Committee’s meeting ending on 13 January, eight 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 the path of domestic costs was more likely to lead to inflation exceeding the target in the medium term than was embodied in the Committee’s collective November projections.
All members agreed 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 only gradually and to a level lower than in recent cycles.
The Committee voted unanimously to maintain the stock of purchased assets financed by the issuance of central bank reserves at £375 billion, and so to re-invest the £8.4 billion of cash flows associated with the redemption of the January 2016 gilt held in the Asset Purchase Facility.
Nick Dixon, Investment Director at Aegon UK, commented:
“A slowing economy and nervous stock market will have kicked the prospect of any major rate rise into late 2016 at the earliest. Falling oil prices and no inflation across the UK economy are giving the MPC good reason to keep rates low in order to steady the ship. With the inflation target looking ever distant, we expect the MPC to remain dovish throughout 2016, with households continuing to benefit from favourable credit conditions.”
Steve Gowler, CEO, RCI Bank, added:
“The Bank of England base rate once again remains static. As our Savings 2025 report with Cebr forecasts, it is likely to rise at the start of 2017, increasing to a steady state of 2% by the end of 2018, where it will remain static until 2025. Average savings interest rates are forecast to increase by 1 percentage point, up to an average rate of 2.3% at the same time.”
Barry Naisbitt, Chief Economist, Santander UK, said:
"It was no surprise that the Monetary Policy Committee once again decided to hold Bank Rate at 0.50% today. With inflation still very close to zero and uncertainties about global economic prospects continuing to be a feature of economic debate, the MPC was unlikely to change the decision taken last month.
The news from recent activity indicators hints that the slowing in quarterly GDP growth seen in the third quarter of last year – to 0.4% – might have reversed in the final quarter of the year. However, MPC members are likely to want to see more evidence on trends in the labour market, inflation and growth before considering any change in policy."
Jeremy Duncombe, Director, Legal & General Mortgage Club, commented:
“Earlier this month, George Osborne warned mortgage holders must be prepared for a UK interest rise in 2016, following the hike in US rates last month. Although such a rise was unlikely in January, it’s crucial that borrowers on an SVR or those at the end of their current agreement look to secure a more beneficial rate by remortgaging now, before lenders price-in the inevitable rise. Banks will start to include any changes in the base rate in their calculations well ahead of a decision by the Monetary Policy Committee."
