BoE could suffer serious hangover in the New Year

10th December 2015 By: Ranko Berich

MPC Meeting – 11/12/15

These MPC minutes highlight an even worse outlook for UK inflation than last month’s report suggested, making a move on rates unlikely any time soon.

The list of reasons to not hike rates just keeps getting longer and fiscal policy will continue to be more like a chokehold than a boost for the economy. Unit labour costs have been eroded by productivity improvements, and compositional effects from younger and unskilled workers making up more of the labour force have also been dragging on inflation. On top of this, commodity prices have also showed few signs of reversing recent declines.

The biggest red light in the minutes is the recognition from the committee that low inflation may be filtering through to wage negotiations. While wage growth remains decent when compared to the post-recession period, the recent levelling off is the first real sign that low inflation may be starting to have a negative effect on the wider economy.

If inflation expectations begin to deteriorate and consumers change their behaviour accordingly, the Bank of England could have a serious policy hangover to deal with in the New Year.