Aha! It looks like weak inflation prospects have forced the hawks to retreat! The BOE meeting minutes revealed that policymakers voted unanimously to keep interest rates and asset purchases unchanged, unlike their previous policy meetings which had a couple of dissenters lobbying for rate hikes.
As it turns out, MPC members Ian McCafferty and Martin Weale rejoined the rest of the cautious policymakers in deciding to sit on their hands for now, as they agreed that increasing interest rates would run the risk of lower inflation. After all, the decline in oil prices has pushed the U.K. headline CPI down from 1.0% to 0.5% – far below the central bank’s 2% target.
Furthermore, the minutes indicated that policymakers are seeing a “roughly even” chance that inflation could fall flat at some point during the first half of this year. Even though BOE Governor Mark Carney and U.K. Chancellor of the Exchequer George Osborne mentioned that falling price levels would support consumer spending in the short-term, a prolonged period of low inflation might wind up doing the economy more harm than good.
BOE officials also expressed concerns about the ongoing slowdown in the euro zone, citing that external economic risks from this region have increased. On the other hand, they did acknowledge green shoots in the domestic economy, such as early signs of a pickup in wage growth, as well as positive developments in the U.S. economy.
In a nutshell, the minutes were a tad more dovish than expected, as the hawkish duo McCafferty and Weale changed their minds about a rate hike. While the British pound sold off after the BOE minutes were printed, the U.K. currency’s losses were limited thanks to the stronger than expected December jobs report released around the same time. Did I mention that the U.K. added 29.7K jobs during the month and brought its unemployment rate down from 6.0% to 5.8%? Impressive, right?
Do you think the pound is in for more losses though? Or have most forex participants already priced in the idea that the BOE would revert back to a more cautious stance? I look forward to reading your opinions in our comments section!