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Bank of England sees oil slump weighing a bit on inflation

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Bank of England policymakers expect the recent plunge in oil prices will weigh a bit on British inflation in the coming months but said it remains unclear if the impact would be lasting.

[LONDON] Bank of England policymakers expect the recent plunge in oil prices will weigh a bit on British inflation in the coming months but said it remains unclear if the impact would be lasting.

The Bank also said economic growth looks like it will be a bit slower than it previously forecast.

However, the fall in oil prices might boost economic growth in Britain and other economies, the central bank said on Thursday as it announced its monthly rate decision, keeping its options open ahead of a new set of forecasts due next month.

The Bank's nine rate-setters voted 8-1 to keep interest rates at a record-low 0.5 per cent for the sixth month in a row at their January meeting this week. "Although the most recent declines in oil prices will depress global inflation in the near term...these conditions should in time provide net support to spending in the United Kingdom and its major trading partners," the Bank said in minutes summing up the discussion at the rate-setting meeting. "Whether the more restrained outlook for activity growth in the near term implied a weakening of inflationary pressure was unclear," the minutes said.

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Ian McCafferty, one of four external members on the nine-person Monetary Policy Committee, voted to increase rates to 0.75 per cent while other policymakers appeared no closer to raising rates.

The BoE's decision comes after sharp falls on global stock markets at the start of 2016, driven by fresh financial turmoil in China, and growing signs of weakness in Britain's economic recovery.

The Bank, in its minutes, sounded largely unconcerned about the market volatility and it welcomed the smooth reaction by US stock markets to the decision by the US Federal Reserve to raise rates for the first time in nearly a decade last month.

Investors have pushed their expectations for a first BoE further back and sterling was trading near a 5 1/2-year low against the dollar and hit a 11-month trough against the euro earlier on Thursday.

A majority of economists polled by Reuters over the past week expected the central bank will start to raise interest rates in the third quarter of 2016, later than a forecast of the second quarter as suggested in a previous poll.

British inflation is only just above zero - far below the BoE's 2 per cent target - and the prospect of a referendum on Britain's membership of the European Union could weigh on growth in 2016.

BoE Governor Mark Carney is expected to give fresh guidance on the Bank's outlook for rates in 2016 when he makes his first speech of the year on Jan. 19.

He had said previously that a decision on when to raise rates was likely to come into "sharper relief" around now.

REUTERS

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