THE Bank of England is in absolutely no hurry to raise UK base rates, despite a faster-than-expected fall in unemployment, minutes of the latest meeting of its Monetary Policy Committee have signalled.
Minutes of the November 6 and 7 meeting, published yesterday, highlight MPC members' awareness of the challenges facing the UK economy, including weak business investment, pressures on consumer spending, and eurozone uncertainties.
MPC members noted the sharper-than-forecast fall in annual UK consumer prices index inflation from 2.7% in September to 2.2% in October. And, while noting upward pressure on inflation from increases in household energy bills, they cited potential for the recent fall in oil prices and rise in sterling to reduce inflation.
The minutes flag the MPC's lack of concern about survey evidence of a rise in households' expectations of future inflation. MPC members saw little sign of increased inflation expectations causing higher pay settlements.
The MPC's votes to hold base rates at their record low of 0.5% and maintain the scale of its quantitative easing programme at £375billion this month were unanimous, the minutes show.
In August, the MPC said it did not intend to raise base rates from their record low of 0.5%, at which they have stood since March 2009, at least until the International Labour Organisation measure of unemployment had fallen to a "threshold" of 7%. It projected at the time that this would not happen until 2016.
In its inflation report this month, the Bank of England forecast, if rates were to remain at 0.5% and the scale of its quantitative easing programme were held at £375bn, ILO unemployment would fall to 7% around the end of 2014.
Yesterday's minutes underline the point made last week by Bank Governor Mark Carney, when the latest inflation report projections were made public, that reaching this 7% rate will not automatically trigger a rise in base rates.
Detailing the nine-strong MPC's discussions two weeks ago around the latest inflation report projections, the minutes state: "With the proviso that medium-term inflation expectations remained sufficiently well anchored, the projections for growth and inflation under constant Bank Rate underlined that there could be a case for not raising Bank Rate immediately when the 7% unemployment threshold was reached."
The MPC's forward guidance on rates would cease to hold if, in its view, it were more likely than not that annual UK CPI inflation 18 to 24 months ahead would be 0.5 percentage points or more above the 2% target. It would also cease to apply if medium-term inflation expectations were not sufficiently well-anchored.
MPC members' belief that a sustained upturn in the UK economy would be likely to require a pick-up in business spending is flagged in the minutes. MPC members noted official data had indicated business investment had fallen in the second quarter.
The minutes state: "The process of balance sheet repair in the household and banking sectors, alongside slow growth in real incomes, might put a brake on the rate of growth of consumer spending before a recovery in business investment had become established.
"The UK economy remained vulnerable to disorderly adjustment in the euro area and in some emerging economies...With the external environment unlikely, therefore, to be an engine of UK growth, and given that the domestic fiscal consolidation would continue over the forecast period at around its current rate, a successful handover from household to business spending would play a crucial role in underpinning the recovery."
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