Bank of England governor Mark Carney speaks during an Inflation Report press conference at the BoE in London yesterday. Carney said the outlook is “consistent” with the need for interest-rate increases — but only in due course.

Bloomberg/London


Mark Carney predicted a bout of “muted” inflation in the UK after all but one of the Bank of England’s policy makers decided that price pressures are too weak to raise interest rates for now.
The BoE governor, presenting an inaugural press conference under a new regime for communicating policy with markets all in one go, said that the outlook is “consistent” with the need for interest-rate increases — but only in due course.
“The exact timing of the first move cannot be predicted in advance,” he told journalists in London yesterday. “It will be the product of economic developments and prospects. In short, it will be data dependent.”
The 8-1 decision by the Monetary Policy Committee to keep the benchmark rate at a record-low 0.5% — with Ian McCafferty the dissenter — was unexpected, with most economists forecasting that at least one other would push for tightening. Officials cut their outlook for UK inflation for the rest of this year, though minutes of their meeting showed that some saw upside risks and were divided on when to begin removing more than six years of emergency stimulus.
The minutes were published alongside the MPC’s decision for the first time, part of a new communications format introduced by Carney and dubbed “Super Thursday.” The BoE also released its quarterly Inflation Report, in which it said the near-term outlook for inflation is muted and the recent decline in energy prices will have an effect until at least the middle of 2016.
“It’s quite dovish,” said David Tinsley, an economist at UBS Group in London. “One of the largest surprises was that they didn’t take any upside news, really, from pay growth.”
Traders pared bets on the BoE raising interest rates, with the implied yield on the short-sterling contract maturing in December falling 4 basis points to 0.71%. Investors are fully pricing in a quarter-point rate increase by May next year, Sonia forwards show.
The pound fell and was trading at $1.5523 as of 1:21pm London time, down 0.5% on the day. The 10-year gilt yield was little changed at 1.97%.
Price growth will average just 0.3% this year, down from 0.6% in May, before accelerating to 1.5% in 2016, the BoE said.
The releases “suggest that an interest rate rise is still not imminent,” said Samuel Tombs, an economist at Capital Economics. The inflation outlook “suggests that most MPC members see the market expectations on which the forecast is based — for interest rates to start rising in spring 2016 — as broadly correct.”
The view on the short-term outlook was echoed in the minutes, where the MPC flagged a risk that the pound’s advance could weigh on inflation for a “persistent period.”
“The near-term outlook for inflation is muted and the falls in energy prices over the past few months will continue to bear down on inflation at least until the middle of next year,” Carney said. “Nonetheless, a range of measures suggest that medium-term inflation expectations remain well anchored.”
That view chimed with a broader consensus on the committee in its decision.
“In light of the reduction in oil prices and the appreciation of sterling over the past three months, it appeared that the increase in inflation over the following year would be more gradual,” the BoE said in the minutes. Nevertheless, “some members saw upside risks to the inflation forecast” because of stronger demand and pay growth and a smaller degree of spare capacity than assumed.
For McCafferty, those risks were enough to “justify an immediate” increase in the key rate to 0.75%.
Over the longer-term horizon, more relevant to the MPC’s policy, the BoE sees inflation at its 2% target in two years and above that level — at 2.1% — a year later. Those projections are based on investor expectations that don’t have a rate increase fully priced in until the third quarter of 2016.
The dissenting vote marks the first split on the MPC this year and comes amid a backdrop of accelerating wage growth and the longest streak of continued economic expansion since before the recession that started in 2008.
The economy will grow 2.8% in 2015 — higher than previously anticipated - and 2.6% next year, according to the Inflation Report projections. Wages will also rise faster this year than forecast in May, at a rate of 3%, and increase 3.75% in 2016.
But the fact that McCafferty was alone came as a surprise after a shift in sentiment toward tighter policy in the past month, including comments from Carney himself that the era of record-low rates would soon be ending.
In the Inflation Report, the BoE offered an upbeat analysis of the UK economy, saying private domestic demand will remain robust as real incomes and confidence increase and credit conditions improve. However, it said there are downside global risks, citing in particular the euro area and China. On the euro region, it said the risk of a disorderly outcome in the Greek debt crisis has reduced.