Bank of England points to new oil price fall, slower wage growth

LONDON (Reuters) - The Bank of England remains unhurried about raising interest rates, pointing on Thursday to a new fall in oil prices and slower wage growth as it kept borrowing costs at the record low where they have sat since 2009.

The British central bank’s policymakers said they would not match an expected rate hike by the U.S. Federal Reserve next week, stressing there was “no mechanical link” with its thinking.

In minutes of its latest policy meeting which ended on Wednesday, the BoE expected the softer public spending cuts announced last month by finance minister George Osborne would give a boost to growth next year.

But overall, the tone of the minutes published on Thursday suggested the Bank was at least a few months away from any move to start weaning Britain off the stimulus of low rates.

Sterling weakened against the U.S. dollar and the euro and British government bond prices rose.

“With inflation not expected to start edging up until next year, or reach target until well into 2017, there is simply no need for the Bank to consider changing tack,” the British Chambers of Commerce’s chief economist, David Kern, said.

Britain’s economy has grown strongly for more than two years but inflation remains below zero and the BoE has kept rates at the level to which they were cut during the worst of the financial crisis nearly seven years ago.

Governor Mark Carney and other Monetary Policy Committee members said the “material news” in the month since they had last met was that oil prices had “fallen markedly again”, which raised the likelihood of inflation staying subdued.

They also highlighted a leveling off in wage growth in Britain, something which is central to the Bank’s deliberations on when interest rates need to rise.

“Despite lower unemployment, nominal pay growth appears to have flattened off recently,” the minutes said.

The slowdown could be a blip in the numbers or the result of people working fewer hours, they said.

Bank of England governor and First Vice-Chair of the European Systemic Risk Board Mark Carney arrives to address the European Parliament's Economic and Monetary Affairs Committee in Brussels, Belgium, December 7, 2015. REUTERS/Francois Lenoir

It might also reflect employers offering lower wage deals because of low inflation, something the Bank has said previously said could hurt Britain’s recovery.

“The Committee noted this effect was likely to reverse in due course, however, as inflation increased,” the minutes said.


The Bank reiterated that it expected headline inflation to remain below 1 percent until the second half of 2016.

When the Bank first made that short-term inflation forecast last month, it prompted investors to push back into late 2016 and 2017 their expectations of when the BoE was likely to finally start raising rates.

A top BoE official then warned investors against reading too much into the Bank’s projections based on market estimates.

Economists polled by Reuters have mostly said they expect the Bank to start to raise rates in the second quarter of 2016.

As he has done since August, Ian McCafferty, an external member of the MPC, voted to increase rates to 0.75 percent but all eight of his colleagues favored keeping them on hold.

BoE Governor Mark Carney has previously said that the decision on when to raise rates was likely to come into “sharper relief” around the turn of the year. But more recently, he has said the Bank will move when the time is right.

Carney’s earlier messages about the possible timing of a rate hike were knocked off course by surprises such as the plunge in oil prices last year.

Another reason for the Bank to be cautious is Britain’s planned referendum on its membership of the European Union.

Economists polled by Reuters said uncertainty over the vote’s result, which could hurt business investment and growth, was the biggest risk to Britain’s economy in 2016.

The BoE said on Thursday that Osborne’s moderated spending cuts could add 0.2 percentage points to growth next year.

Writing by William Schomberg; Editing by Catherine Evans