Although the decision was unanimous, a higher number of policymakers believe inflationary pressures may arise sooner than anticipated, bringing inflation rate back to 2 percent target sooner than expected. Yet, for those members, the uncertainty about Greek crisis was determinant to vote for holding rates. The Governor Marc Carney signaled recently the decision about the timing of raising rates will come by the end of the year.
Excerpts from the Minutes of the MPC meeting ending 8 July 2015:
Overall, Committee members agreed that the domestic economy had continued to strengthen over the past year, that the margin of spare capacity had continued to shrink, and that domestic cost pressures had increased. Moreover, recent developments had diminished the risk that low rates of current inflation would feed through into wage settlements, thereby prolonging the period for which inflation would remain below the target. There were, however, differences of view as to how significant the increases in domestic cost pressures had been. For some, they were no more than a part of the increase that would be necessary in order for inflation to rise sufficiently to meet the 2% target after the commodity-related factors that were temporarily depressing it had waned. For others, it appeared as though domestic cost pressures had risen more quickly than expected which, combined with the view that spare capacity in the labour market was close to being exhausted, raised the possibility that inflation might reach the 2% target sooner than anticipated.
Internationally, data releases had generally corroborated the Committee’s view that the second quarter’s data would show a modest bounce back from what had appeared to have been a temporary slowdown in global activity in 2015 Q1. But these data developments had been overshadowed by events in Greece and China and the risks that they appeared to present to the outlook.
In light of recent developments, all members thought it appropriate to leave the stance of monetary policy unchanged at this meeting. For a number of members, the balance of risks to medium-term inflation relative to the 2% target was becoming more skewed to the upside at the current level of Bank Rate. For these members, the uncertainty caused by recent developments in Greece was a very material factor in their decisions: absent that uncertainty, the decision between holding Bank Rate at its current level versus a small increase was becoming more finely balanced. For most members, even before accounting for the recent increase in uncertainty in the external environment, the current stance of monetary policy remained appropriate to balance the risks of inflation around the target in the medium term. For all members, the policy decision this month was clear cut.
For all members of the Committee, the central message of the guidance that it had given in its February 2014 Inflation Report remained relevant: given the likely persistence of the headwinds weighing on the economy, when Bank rate did begin to rise, it was expected to do so more gradually than in previous cycles. Moreover, the persistence of those headwinds, together with the legacy of the financial crisis, meant that Bank Rate was expected to remain below average historical levels for some time to come. The actual path that Bank Rate would follow over the next few years was uncertain, and would depend on the economic circumstances. The Committee’s guidance on the likely pace and extent of interest rate rises was an expectation, not a promise.