Bank of England aficionados will be closely watching on Wednesday the level of unity among the nine-member rate-setting committee in light of significantly low inflation in the UK. Wednesday's publication of the MPC minutes will reveal more.
The UK inflation rate slowed sharply to 0.5% in December as much of the downward pressure came from gas and electricity price rises from December 2013 falling out of the official statistics in December 2014. A 50% oil price drop in 2014 has translated into a continuing motor fuel price fall that also added to that downward price pressure.
In light of those disinflationary pressures, did Martin Weale and Ian McCafferty, the two hawks sitting on the Bank of England's (BoE) nine-strong rate-setting committee, continue to vote for a rate hike in January?
Some would argue that it would make sense that both Weale and McCafferty dropped their votes in January as Governor Mark Carney prepares a draft of an open letter to Chancellor George Osborne explaining why inflation is so low and what the central bank proposes to do to ensure inflation returns to the target.
In his recent interview with the media, Governor Carney said inflation was expected to fall further down towards zero as fuel prices continued to decline. With this in mind, it would sound more than logical for the rate-setters to unite in maintaining the policy unchanged.
But most of that downward pressure stems from a one-off technical effect as well as the temporary low prices of energy. Carney himself reassured the public last week when he said the BoE would begin to tighten monetary policy in the foreseeable future, despite the current level of consumer price inflation wallowing at a record low.
"It’s a question of the pace of those interest rate increases and the degree. Relative to a year ago it’s probably a little more gradual and a little more limited than it was then, largely because of factors outside our shores, there are these disinflationary or low inflation pressures globally. But we are still in a world where we would expect to start to what we call normalize policy, raise interest rates, over that horizon," Carney said.
MPC Hawks' arguments
Both Weale and McCafferty argued at previous MPC meetings that the monetary policy decisions taken today are to deliver the inflation target in the medium term and, therefore, "it was largely appropriate to look through the short-term effects of such price movements [cheaper oil and other imports]."
Martin Weale already voted for a rate hike back in 2011, when the post-crisis annual CPI peaked at 4.5% for the whole of 2011. At that time, Weale was voting for a 25 basis point rate increase between January and July 2011 before dropping the vote in August, arguing that a significant margin of spare capacity and low pay growth at that time meant inflation was to drop to target in the medium-term.
The UK CPI did reach a post-recession peak of 5.2% in September 2011 before descending to its present level of 0.5% - the joint record low.
At present again, Weale and McCafferty have been arguing that "just as the [MPC] Committee had looked through the first-round effects of external price pressures when they had pushed inflation up, it was appropriate to look through them at present when they were pushing inflation down."
Both Weale and McCafferty also argued at the previous two meetings that a sharply tightening labour market was expected to result in rising wages markedly and "since monetary policy could be expected to operate only with a lag, it was desirable to anticipate labour market pressures by raising the Bank Rate in advance of them."
Rift among doves
The January MPC minutes should also reveal the level of unity among the dovish majority. The latest two minutes showed that in this group, "there was a material spread of views on the balance of risks to the outlook [for inflation]."
Some argued that "there was a risk that growth might soften further than anticipated and that inflation might persist below the target for longer than expected."
Against this, there was a risk "that the degree of spare capacity would be eliminated more quickly than assumed" which in turn "would potentially result in inflation rising to, and subsequently overshooting, the 2% target.
Low inflation to boost GDP in 2015
Despite the current round of softer economic surveys, growth in 2015 is expected to remain steady. Weak inflation should continue to boost domestic spending and, despite a sudden decline in the third quarter of 2014, business investment is expected to pick up this year.
The UK labour market is predicted to tighten further throughout this year and unemployment should continue to fall while wage growth is expected to strengthen well above inflation. The BoE's policy decisions will also reflect economic vulnerability to the post-election political environment as well as the euro zone's struggle with deflation and political risks.
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