Bank of England policymakers voted 8-1 to keep rates at a record low 0.5 per cent this month, and most saw a relatively soft outlook for inflation, suggesting they are in no hurry to raise interest rates.
The central bank said cost pressures in Britain’s labour market were rising too slowly for inflation to return to its two per cent target, especially given the past strength of sterling, and that inflation would stay below one per cent until spring 2016.
British inflation fell back to zero in August, but officials had been confident that robust domestic growth and the fading effect of last year’s big oil price falls would cause it to bounce back towards its two per cent target next year.
Official data last week showed unit labour cost growth jumped to 2.2 per cent in the second quarter of 2015, more than double the rate the BOE had previously estimated, but the BOE said this overstated the true strength of cost pressures.
Most economists still think a rate rise is likely early next year
“Increases in unit labour costs remained lower than would be consistent with CPI inflation returning sustainably to the two per cent target, were they to persist at current rates,” the BOE said.
One of the nine-member Monetary Policy Committee, Ian McCafferty, dissented with the majority outlook and voted for a quarter-point rate rise for a third month in a row, saying inflation would probably overshoot its target due to building domestic cost pressures.
Financial markets have meanwhile pushed back their bets on when British rates will start to rise to the tail end of next year or even early 2017, on the back of slowing job creation in the US.
But most economists still think a rate rise is likely early next year, though some are starting to forecast a slightly later move as doubts mount about whether the US Federal Reserve will tighten policy before the end of 2015.
Recent revisions to official data suggested that Britain’s domestic economy was cooling slightly after a period of above average growth, which – combined with ongoing government spending cuts – “might presage a slightly weaker outlook”.
The BOE said it expected growth of 0.6 per cent in Q3.