UK central bank the Bank of England announced on Thursday that its Monetary Policy Committee (MPC) meeting, held on 9 September 2015, the committee voted by a majority of 8-1 to maintain the Bank Rate at 0.5%.
The MPC, which sets monetary policy in order to meet the 2% inflation target and in a way that helps to sustain growth and employment, also voted unanimously to maintain the stock of purchased assets financed by the issuance of central bank reserves at GBP375bn.
According to the bank, twelve-month CPI inflation rose slightly to 0.1% in July but remains well below the 2% target rate. Unusually low contributions from energy, food and other imported goods prices were reflected in about three quarters of the gap between inflation and the target, while the remaining quarter reflects the past weakness of domestic cost growth and unit labour costs.
Despite a recovery in pay growth since the beginning of 2015, the recent increase in productivity means that the annual rate of growth in unit wage costs is currently around 1%, which is lower than would be consistent with meeting the inflation target in the medium term, if it was to persist.
In addition, the appreciation of sterling since mid-2013 is having a continuing impact on the prices of imported goods. These factors combined has resulted in the average of a range of measures of core inflation remaining subdued, although it picked up slightly in July to just over 1%.
Because of below target inflation, the MPC has collectively judged that there are some underutilised resources in the economy and intends to set monetary policy in order to ensure that growth is sufficient to absorb the remaining economic slack so as to return inflation to the target within two years.
In its August Inflation Report, the MPC said its aim of returning inflation to the target within two years was thought likely to be achieved conditional upon Bank Rate following the gently rising path implied by the market yields prevailing at the time. Private domestic demand growth is expected to be robust enough to eliminate the margin of spare capacity over the next twelve months, despite the continuing fiscal consolidation and modest global growth. In turn, an increase is expected in domestic costs needed to return inflation to the target in the medium term, as the temporary negative impact on inflation of lower energy, food and import prices declines.
The MPC has also noted that the risks to the growth outlook were skewed moderately to the downside, which in part reflects risks to activity in the euro area, as well as to prospects in China and other emerging economies. This has resulted in markedly higher volatility in commodity prices and global financial markets.
However, the MPC expects continued healthy domestic expansion, with domestic momentum being underpinned by robust real income growth, supportive credit conditions, and elevated business and consumer confidence. Also, unemployment rates have dropped by over 2 percentage points since the middle of 2013, although that decline has recently levelled off.