Excerpts from the BoE Minutes of the Monetary Policy Committee Meeting held on 7 and 8 January 2015:
The fall in CPI inflation to 0.5% in December was in line with Bank staff’s expectations immediately before the data release, but 0.5 percentage points lower than expected at the time of the November Inflation Report. Although the full details were not yet available, the fall in CPI inflation on the month was likely to have largely reflected lower fuel prices and utility price increases in December 2013 dropping out of the annual comparison. CPI inflation was expected by Bank staff to reach a trough of around zero in March, as lower oil prices fed through to petrol prices, with a roughly even chance that it would temporarily dip below zero at some point in the first half of 2015.
There had been a number of significant developments since the November Inflation Report. Oil prices had fallen further: the spot price of Brent crude oil had dropped to $50 per barrel, down $20 on the month and $32 lower than at the time of the November Inflation Report. CPI inflation had fallen to 0.5% in December, 0.5 percentage points lower than had been expected in November, and was now expected by Bank staff to reach a trough of close to zero in March, as lower oil prices fed through to petrol prices. There was, therefore, a roughly even chance that CPI inflation would temporarily dip below zero at some time during the first half of 2015. Inflation had also fallen abroad and was negative in the euro area. Market interest rates had declined as the expected pace and extent of future UK monetary policy tightening had been scaled back. The one-year sterling rate one year ahead had fallen by close to 20 basis points and was 40 basis points lower than at the time of the November Inflation Report. By comparison, there had been relatively little news on activity. Growth remained solid in the United Kingdom and United States, but subdued in the euro area and was slowing modestly in the emerging economies.
In the view of all members, the outlook justified maintaining both the current level of Bank Rate and the stock of asset purchases financed by the issuance of central bank reserves. It was possible that the risks to CPI inflation in the medium term might have, if anything, shifted to the upside, but all members were also alert to the downside risk of current low inflation becoming entrenched. Monetary policy could and would be adjusted at the appropriate time to ensure that CPI inflation was on track to meet the 2% target in the medium term.
For the two members who had voted in the previous month for an increase in Bank Rate, the decision this month was finely balanced. They believed that the sharp fall in inflation to below the 2% target 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. They also noted the most recent evidence that wage growth was more buoyant than they had expected. Nevertheless they noted the risk that low inflation might persist for longer than the temporary factors implied and concluded that this risk would be increased by an increase in Bank Rate at the current juncture.