As widely expected, the official interest rate remained at a record-low 0.5% and asset purchase program stayed at £375 billion. The main surprise was that the updated forecasts and analysis in the Inflation Report prompted BoE policymaker Ian McCafferty to no longer vote for a rate rise. He had been the only policymaker to vote for a rate hike in recent months.
Overall, the minutes and Inflation Report seemed more dovish in tone than in November. In particular, the Bank appears more concerned about the growth prospects for emerging markets, particularly China. The global, US and euro zone growth forecasts for this year were all revised down slightly.
The downward revisions to the forecasts for UK GDP growth were a bit larger. The UK economy is now expected to grow 2.2% this year, roughly in line with our forecast of 2.1%, and 2.3% in 2017.
Also, the forecasts for business investment in the coming years were revised down but still look a bit strong to us. The reasons cited by the BoE for the strength of business investment were the same as previously such as that companies still have a lot on cash. Yet for the first time, the BoE noted that the weakness of investment in oil and gas would weigh on overall investment. This highlights what we’ve recently seen in our Manufacturing Outlook survey: that the low crude oil price has significantly reduced demand for investment goods, particularly mechanical and electrical equipment.
The forecast of the annual inflation rate for early next year was revised down slightly to 1.2% because the BoE thinks there could be more spare capacity in the UK labour market than previously thought, and cut its oil price forecast. Yet the inflation forecast for early 2018 was unchanged at 2.1%. In the final analysis, the downbeat minutes and inflation report reduce the chance of the BoE starting to raise interest rates anytime soon.