Bank of England plays down China fears

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The minutes of the BoE’s Monetary Policy Committee meeting suggest policymakers remain on track to raise interest rates early next year.

Yet again, the minutes of the meeting were of more interest than the actual decision. The MPC kept the main refinancing rate at a record-low 0.5% and the asset purchase target at £375 billion on Thursday, as widely expected. For the third consecutive month, only one out of the nine MPC members voted to increase the key policy rate.

The minutes indicated MPC members were a little less worried about developments in China than they had been last month, suggesting they remain on track to start raising official interest rates early next year. BoE Governor Mark Carney previously said the MPC is likely to start think about increasing interest rates at around the turn of this year.

Despite the threat of interest rates rising in early 2016, higher borrowing costs aren’t at the top of UK manufacturers’ concerns. The export environment is very challenging, thanks to slower economic growth in emerging markets including China, the weak recovery in the euro zone (which contains some of the top destinations for UK manufactured goods), and the strength of the pound against the euro. Also, upcoming decisions in the Spending Review in relation to support for exporters will be crucial in supporting manufacturers’ confidence in the year ahead. In addition, the Brent crude oil price remains relatively low, weighing on demand for investment goods in the oil and gas sector.

The BoE’s second-ever “Super Tuesday” – involving the simultaneous release of the MPC’s decision, minutes of the meeting, and updated quarterly forecasts - will be on November 5. The Bank’s most recent forecasts showed that the annual inflation rate was expected to rise to 2.1% in the fourth quarter of 2017, slightly above its target of 2% in around two years’ time. If the BoE's inflation forecast for late 2017 is revised down in November, interest rates will be likely to stay low for longer.

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