‘Dovish’ MPC targets inflation as Eurozone fears grow

The two hawks on the Bank of England’s monetary policy committee have not managed to convince any other members to support a rate hike, minutes show.

The minutes of the 3 and 4 September MPC meeting, released today, show Ian McCafferty and Martin Weale argued once more for increasing the bank rate 25 basis points from its all-time low of 0.5 per cent to 0.75 per cent.

The pair made the same argument at the August meeting.

The committee was concerned about the poor growth figures coming out of the Eurozone and the looming risk of deflation. It could have significant medium to long-term impact on the UK if it persists, the minutes say.

“Although the direct impact on the United Kingdom of the current phase of disappointing activity might be relatively modest, a prolonged period of poor growth and very low inflation could have a larger impact if it led once again to uncertainty about the sustainability of euro-area public and external debt,” the minutes say.

While the committee expects UK growth to continue at a pace close to its longer-term average there were “early indications” that it would begin to slow toward the end of the year.

A tightening labour market unaccompanied by wage growth still puzzles the committee, although it discussed some ideas that could explain it.

During the recession the number of employees changing jobs slowed sharply, as did voluntary resignations. That has continued until only recently, possibly because of a “lingering risk aversion” due to the extent of unemployment during the recession.

When labour market turnover increases that may spark wage inflation, the committee reasoned.

Another cause for sluggish paypacket growth could be changes in the composition of the workforce.

Capital Economics senior UK economist Samuel Tombs says the minutes were “dovish” and the two members seeking a rate rise had not converted any other members.

“What’s more, various passages of the minutes suggest that the committee is placing more emphasis on the current weakness of CPI inflation and pipeline price pressures, than on theoretical estimates of the amount of spare capacity,” he explains.

“Given that CPI inflation looks set to continue to ease over the rest of this year, the chances of a 2014 rate hike now look slim.”