Economists are torn apart as to when the Bank of England will be raising its historical low 0.5% interest rate, but a consensus is emerging that a combination of the frail global recovery and weak demand will be pushing any increase further back until the late 2015.
Minutes of the October Monetary Policy Committee meeting showed that the committee was divided for the third consecutive month as to whether they should push through with the increased rates, with seven members voting to remain and hold while two others voted otherwise for an immediate increase.
The two hawkish members were able to mention the rapid reduction in spare capacity that happened in recent months, but concerns regarding the over-below target inflation and the global economy persisted to sway most of the majority.
The majority of the MPC voted in the affirmative to maintain low rates on the basis that albeit the recovery, consumer price inflation will continue to fall.
The September rate was 1.2% and the central banks around the globe are now weary regarding the low inflation or deflation than rising prices. Even the BoE inflation report during the third quarter was not able to foresee inflation reaching the target of 2% until 2017.
As a result of the global economy’s depressing outlook, commodity prices have fallen and might possibly fall even more which basically means that the rate of inflation in real danger of going too far under target in the near term.
The Bank of England’s margin around the central target is a percentage point on either side, which means that the inflation might easily fall below the lower end of the said range.
The first rise in interest rates to come in November 2015 will continue despite a low-inflation environment, provided the Bank of England will keep its rates low.
Given the downside risks posed by the Eurozone weakness, it is essential to prop up domestic demand to make sure that the U.K. can recover. The minutes indicate very little sign of future inflationary pressure and truly inflation is predicted to fall in the coming months.
Last month’s fall in inflation which the MPC would have experience would have seen at the time of the session in spite of the figure not being publicly released subsequently, which underlines the case for leaving interest rates on hold.
It appears increasingly possible that the chancellor will be receiving a letter from the MPC in the near future explaining the reason why it has fallen below 1%.
Finally, the prospect of recession in the Eurozone, being the largest export market creates a harsh risk to the U.K.’s recuperation.