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Bank of England sticks to rate plan despite China turmoil Bank of England sticks to rate plan despite China turmoil
(about 7 hours later)
Bank of England policymakers fear China’s slowdown could “add to the global headwinds” facing the UK economy in the coming months, but it is too early to derail their plans to raise interest rates off course. Bank of England policymakers have offered a reassuring verdict on the impact of China’s market meltdown, insisting that while it would “add to the global headwinds” facing the UK, their plans to raise interest rates remained on track.
One member of the Bank’s nine-member monetary policy committee, former CBI economist Ian McCafferty, voted for an immediate increase in borrowing costs from their record low of 0.5% at the meeting that concluded on Wednesday — the same voting pattern as in August. One member of the Bank’s nine-member monetary policy committee, former CBI economist Ian McCafferty, voted for an immediate increase in borrowing costs from their record low of 0.5% at the meeting that concluded on Wednesday – the same voting pattern as in August.
Related: Bank of England votes 8-1 to leave UK interest rates unchanged - live updatesRelated: Bank of England votes 8-1 to leave UK interest rates unchanged - live updates
But the minutes of the meeting, published on Thursday, offer the first insight into how UK policymakers are weighing the potential costs of China’s downturn for economic recovery at home. But the minutes of the meeting offered the first insight into how UK policymakers are weighing the potential costs of China’s downturn.
Developments in China, where crashing share prices and a devaluation of the yuan unleashed shockwaves across global financial markets in August, were, “the main focus of the committee’s decision”, the minutes show. They concede that, “these developments have the potential to add to the global headwinds to UK growth and inflation”. Events in China, where crashing share prices and a devaluation of the yuan unleashed shockwaves across global financial markets in August, were “the main focus of the committee’s decision”, the minutes showed. “These developments have the potential to add to the global headwinds to UK growth and inflation,” the MPC members said.
However, balancing the risks for the UK from a Chinese downturn against robust domestic demand, the MPC concluded there was not yet any reason to tweak the relatively upbeat forecasts for the economic outlook set out in last month’s quarterly inflation report. However, balancing the risks for the UK from a Chinese downturn against robust domestic demand, the MPC concluded there was not yet any reason to question the relatively upbeat forecasts in last month’s quarterly inflation report, though the Bank’s economists now expect growth of 0.6%, instead of 0.7%, in the coming quarter.
“Global developments do not as yet appear sufficient to alter materially the central outlook described in the August Report, but the greater downside risks to the global environment merit close monitoring for any impact on domestic economic activity”, the minutes say. “Global developments do not as yet appear sufficient to alter materially the central outlook described in the August Report, but the greater downside risks to the global environment merit close monitoring for any impact on domestic economic activity,” the minutes said.
Mark Carney, the Bank’s governor, has made clear that he believes interest rates may have to start rising around “the turn of the year”, but will increase more slowly, and to a lower level, than in previous years. He used his recent speech at the annual gathering of central bankers in Jackson Hole, Wyoming, to play down the impact of China’s woes on UK policy. Mark Carney, the Bank’s governor, has made clear he believes interest rates could start rising around “the turn of the year”, but they will increase more slowly and to a lower level than in previous years. He used his recent speech at the annual gathering of central bankers in Jackson Hole, Wyoming, to play down the impact of China’s woes on UK policy.
At home, the MPC says, “domestic momentum is being underpinned by robust real income growth, supportive credit conditions, and elevated business and consumer confidence”. At home, the MPC said, “domestic momentum is being underpinned by robust real income growth, supportive credit conditions, and elevated business and consumer confidence”.
Policymakers appear to be divided about how to read the growing signs of a slowdown in the labour market, after the latest official figures showed a slowdown in employment growth. “On one view, the slowing employment data might imply that labour demand had plateaued, and that this would keep pay growth muted,” the minutes say. “On another view, however, the slowdown in employment might reflect greater hiring difficulties, consistent with survey evidence of skills shortages”. Despite inflation running at just 0.1% against the Bank’s target of 2% – and expected to dip below zero again in the coming months – some MPC members saw “continued upside risks to inflation relative to the target”.
Thursday’s minutes also repeat the formula that Carney’s “forward guidance” about the future pace of interest rate rises is, “an expectation, not a promise”. Markets currently expect interest rates to start increasing in the middle of 2016. Sterling rallied modestly, jumping by about half a cent against the dollar, after the minutes were published, as the markets digested the MPC’s relatively relaxed approach to August’s tumultuous trading.
“The MPC seems a bit more sanguine about the recent volatility in financial markets and slowdown in [emerging markets] than the market had perhaps expected,” said Elizabeth Martins, an economist at HSBC.
However, she warned that the deteriorating outlook for emerging markets could yet force the Bank to delay raising rates. “While the MPC’s assessment is upbeat for now, further disappointing data over the coming weeks could make them more cautious.”
MPC members appeared to be divided about how to read the growing signs of a slowdown in the labour market, after the latest official figures showed faltering employment growth. “On one view, the slowing employment data might imply that labour demand had plateaued, and that this would keep pay growth muted,” the minutes said. “On another view, however, the slowdown in employment might reflect greater hiring difficulties, consistent with survey evidence of skills shortages.”
Thursday’s minutes also repeat the formula that Carney’s guidance about the future pace of interest rate rises is “an expectation, not a promise”.
Markets expect interest rates to increase in early 2016; but Vicky Redwood, UK economist at consultancy Capital Economics, said the MPC was unlikely to be in any hurry. “The economic recovery in the UK appears to have faltered (albeit temporarily in our view), the labour market has weakened and a return to deflation in the next few months is likely. What’s more, there have been positive signs that productivity is picking up, which will keep unit wage costs and inflation subdued further ahead,” she said.
The governor will appear before MPs on the cross-party Treasury select committee next week to set out his expectations for the economy, alongside MPC members Martin Weale, Kristin Forbes and Ian McCafferty.