Unanimous again.

21st January 2015

Ian Copelin, Investment Director, my wealth comments “The minutes of the last Monetary Policy Committee (MPC) meeting held on 7-8 January 2015, were released this morning and showed that both Martin Weale and Ian McCafferty have dropped their call for an interest-rate increase.  Consequently, all of the Bank of England’s policy makers voted to keep interest rates on hold at 0.5%.

Martin Weale and Ian McCafferty have been voting for a 0.25% interest rate increase since August 2014 and it’s surprising that it has taken them quite so long to drop their call:  UK inflation has fallen steadily since last June, when it stood at 1.9% (below the MPC target of 2%) to 0.5% today helped by the widely reported supermarket price war (food prices fell nearly 2% during 2014) and falling oil price (the price of Brent crude has fallen from just over $111 in late June 2014 to just $49 today).

However, Martin Weale and Ian McCafferty suggested that the fall in inflation was “probably driven largely by temporary factors and was unlikely materially to affect the behaviour of households and businesses in such a way that it became self-perpetuating”.  While it is positive that they have changed their minds (albeit, in my opinion, late), this statement hasn’t helped their credibility.  While a falling oil price has had an immediate impact on the inflation rate by lowering its energy cost component (as petrol pump prices are directly derived from oil, their prices have followed oil prices down very closely), it will also have a longer-term impact as the energy cost component also includes household gas and electricity which, as we saw earlier this week in the announcements from British Gas and Scottish Power, household gas price cuts won’t be implemented until late February.  In addition, oil/energy prices represent a considerable portion of the production cost for many of our goods and services, which will take time to be fed through to a lower inflation rate, not to mention that as we will now pay less for petrol and heating, we may be more accepting of smaller/no wage increases, which will also decrease the production costs of items that will ultimately feed into lower inflation!

The MPC also said that UK inflation may drop to 0% in the first quarter of 2015. This is hardly surprising.  At the time of the December inflation calculation, the average price per litre was 116.8p for petrol and 122.9p for diesel.  With the forecourt fuel price cuts we have already seen so far this month, this source of deflation will feed into lower inflation (or deflation) over the next month or so.

The MPC went on to state that the fall in inflation “might become more persistent if it lowered inflation expectations, pay and other cost growth in a way that became self-perpetuating.”  This is a clear warning that deflation would be a worry if it encouraged consumers to delay their spending on the expectation of lower prices in the future.

Consequently, I don’t expect the Bank of England’s MPC will increase rates until mid/late 2016 at the very earliest.”