Bank of England policymakers see oil price fall lowering short-term inflation

[LONDON] Bank of England policymakers focused heavily on falling oil prices in their December meeting, and the majority who have been voting to keep interest rates on hold appeared slightly more united.

Minutes of the BoE Monetary Policy Committee's Dec 3-4 meeting released on Wednesday showed the majority thought the weak outlook for inflation warranted keeping interest rates on hold at a record low 0.5 per cent.

Ian McCafferty and Martin Weale, who have voted for a rate hike since August, continued to argue that below target inflation was largely the result of a higher exchange rate and lower raw material prices.

Policymakers said oil prices had fallen much more sharply than they expected in November. They said inflation was likely to fall below one per cent in December - far below its 2 per cent target - and was likely to stay lower than previously thought.

"However, there was also a risk that the degree of spare capacity could be eliminated more quickly than previously assumed, particularly if Bank Rate were to follow the path implied by market yields," the majority in favour of keeping rates on hold said.

The minutes showed that different members saw different risks, but they did not repeat November's language of there being a "material spread of views", which had caused market analysts to believe that some members were edging closer towards raising rates.

British inflation last month fell unexpectedly to 1.0 per cent, its lowest level in more than 12 years and far below the BoE's 2 per cent target, according to data published on Tuesday.

Oil fell below US$59 a barrel for the first time since May 2009 on Tuesday.

BoE Governor Mark Carney said on Tuesday the fall in oil prices was an "unambiguously net positive" for Britain's economy but added that the BoE would look through the direct effect of the fall in oil prices on inflation.

The BoE has focused more on wage growth as it considers when to start raising rates. Data due to be released at the same time of the minutes on Wednesday was expected to show earnings rising faster than inflation for a second month in October.

The minutes showed the majority who voted to keep rates on hold thought faster pay growth would be required to meet the 2 per cent inflation target.

However, those in favour of a rate rise thought this was already in train.

Financial market investors have pushed back their bets on the timing of the next interest rate hike markedly over the past few months, and are now pricing in the first move late next year.

Last month the BoE issued forecasts that showed British inflation will likely fall below one per cent in the next six months, while Mr Carney suggested markets were right to rule out an interest rate hike any time soon.


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