Roundup: BoE looks beyond deflation, eyes on interest rate raise

The Bank of England (BoE)'s nine-member Monetary Policy Committee (MPC) voted unanimously on maintaining the benchmark interest rate, as the risk of deflation mounts in the country, according to the central bank's meeting minutes published on Wednesday.

However, the policy makers looked beyond the possibility of temporary deflation to discuss the option of raising the interest rate later on.

The British central bank announced on Feb. 5 that the bank rate would stay at 0.5 percent and the stock of asset purchases, or quantitative easing policy, would remain at 375 billion pounds (or 578 billion U.S. dollars). It is the second month of opinion consensus among the policy makers on interest rates.

During the five consecutive months ending December 2014, however, there was a two to seven opinion split on the interest rate decision. Two policy makers, Ian McCafferty and Martin Weale, preferred to raise interest rates immediately.

In the most recent February meeting, the MPC believed that given the reduction in oil prices, inflation would decline further - probably to around zero - in the spring of 2015, and stay at around that level for several months. The minutes said it was "more likely than not" that CPI inflation would dip briefly below zero at some point in the first half of the year.

Data from the Office for National Statistics (ONS) showed Britain's consumer-price inflation rate experienced a record low of 0.3 percent in January 2015, lower than the previous month's 0.5 percent.

But the MPC noted that given the likely persistence of headwinds slowing down the economy, when the benchmark interest rate or bank rate did begin to rise, it was expected to do so only gradually, meaning the bank rate was expected to stay below average historical levels for some time to come.

The policy makers also judged that after the effects of energy and food price fluctuations had abated, the inflation rate would return to the target 2 percent. As a result, the committee would seek to set monetary policy so that this would take place within two years.

OPINION DIVERGE

The strong recovery of the British labor market, especially as it relates to household income, provides more justification to consider an interest rate raise.

The British unemployment rate fell to 5.7 percent in the three months leading up to December 2014, lower than a year earlier (7.2 percent) and registered the lowest level since mid-2008, ONS data showed.

Meanwhile, in the same period, British employees' total pay was 2.1 percent higher than a year earlier.

Vicky Redwood, chief UK economist at Capital Economics, said in a note that the committee was more divided over the next move in interest rates than the unanimous vote would suggest.

"Martin Weale and Ian McCafferty, who recently dropped their call for an interest rate rise, do not seem to be far off reinstating it, with the minutes stating that for two members 'there could be well be a case for an increase in Bank Rate later in the year,'" said Redwood.

The London-based economic forecaster believed the current real wage recovery was likely to pick up the pace in the coming month, as the labor market continues to tighten. This could persuade the BoE to rethink its monetary policy, she said.

"A rate rise this year remains a possibility," added Redwood.

Martin Beck, senior economic adviser to the EY ITEM Club, also commented the minutes "struck a mixed tone."

"For two committee members, the decision to keep the bank rate on hold was with a case for increasing rates later this year. And for another member, the next move in monetary policy was as likely to be a loosening as a tightening. The divisions among the MPC, which appeared to have diminished in light of January's unanimous vote, may be re-emerging," said Beck. Endit