If Mark Carney made a New Year’s resolution to raise UK rates, the rest of the world isn’t helping.
Since the Bank of England’s meeting last month, oil has dropped to a 12-year low, the World Bank cut its global growth forecasts, and China’s yuan devaluation wiped $4tn from global equity markets. Those headwinds may overshadow any pressure Governor Carney might have faced to follow the US Federal Reserve, which raised its key rate for the first time since 2006 last month.
With inflation stuck near zero and price pressures softening, economists now don’t see the BoE increasing the key rate from 0.5% until the third quarter. Minutes of the Monetary Policy Committee’s meeting published alongside its policy announcement on Thursday will show how officials voted and whether the outlook, along with slower growth in UK salaries, was enough for Ian McCafferty to abandon his push for higher borrowing costs.
“I could see them pointing to more downside risks about the global growth outlook,” said Chris Hare, an economist at Investec and a former BoE official. “This fizzling in wage growth is a key thing that is starting to make the MPC think that perhaps those all-important domestic inflation pressures aren’t there to the extent they thought.”
Prime Minister David Cameron said on Sunday that while the British are enjoying a strong economy, “it’s right to warn of the difficulties we face in the world,” such as tensions in the Middle East and a slowing in China. Chinese stocks extended their slide yesterday, dropping 5.3% after factory-gate prices fell a record 46th month.
The risks, together with the prospect of a referendum on Britain’s European Union membership, last week prompted a swathe of banks including Goldman Sachs Group Incand Bank of America Merrill Lynch to push back forecasts for the first BoE rate increase to the fourth quarter. Investors are even more pessimistic, not fully pricing in a hike until after February 2017.
A survey published last week showed service-company confidence dropped to a three-year low in December, reflecting uncertainty surrounding the EU vote. Cameron has yet to set a date, though it could come as soon as June.
At home, a tightening labour market hasn’t caused a quick pick-up in wages. Pay excluding bonuses rose an annual 2% between August and October, the least since February, according to official data, while a Markit gauge of starting salaries for permanent jobs fell to a 26-month low in December.
“The risks appear to be tilting towards a later move,” said Ross Walker, an economist at RBS in London, which forecasts the first rise in bank rate in August 2016.
“Disinflationary data present the most immediate hurdle while potential disruption from the EU referendum could thwart any move later in the year.”
Still, the inflation news isn’t all bad. The Fed’s move and global turmoil have pressured the pound, pushing it to its lowest level since 2010 and easing deflation pressures in the economy. McCafferty will maintain his push for an increase for now, with the committee voting 8-1 to keep the key rate on hold, a Bloomberg survey showed.
A slump in oil has prompted a shift in voting before. In January 2015, McCafferty and fellow official Martin Weale reversed their pushes for a quarter-point rate increase, after falling energy prices raised the risk that low inflation would become entrenched.
Downward revisions to official growth data and the added risk of Brexit means that the MPC will “be even more cautious than they have been previously on the economy,” said Kallum Pickering, an economist at Berenberg in London.