The Bank of England (BOE) held its benchmark Bank Rate steady at 0.5 percent as only one member of its Monetary Policy Committee (MPC) voted to raise it by 25 basis points while all nine members agreed to maintain the stock of purchased assets at 375 billion pounds.
In its second statement since changing the way it communicates policy decisions, the BOE added that global developments "do not as yet appear sufficient to alter materially the central outlook described in the August report, but the greater downside risks to the global environment merit close monitoring for any impact on domestic economic activity."
As in August, MPC member Ian McCafferty voted on Sept. 9 to raise the bank rate, arguing that "building domestic cost pressures would otherwise be likely to lead to inflation overshooting the target in the medium term."
In its latest policy report, the BOE lowered its forecast for inflation, with the average forecast - as expressed by the mean - cut to 0.3 percent by the fourth quarter of this year from May's forecast of 0.6 percent. For the fourth quarter of 2016 the forecast was trimmed to 1.5 percent from a previous 1.6 percent while the 2017 forecast was steady at 2.1 percent.
"The MPC judges that it is currently appropriate to set policy so that it is likely that inflation will return to the 2% target within two years," the BOE said, adding that conditional on a gradual rise in the Bank Rate, as currently implied by financial markets, that aim is likely to be achieved.
Headline inflation in the United Kingdom rose slightly to 0.1 percent in July from zero percent in June, with the BOE attributing three-quarters of the difference to its target to low prices of energy, food and other imported goods. The remaining gap reflects weak cost growth and labour costs.
While pay rises have recovered somewhat this year, productivity has also risen which means that the annual growth in wages is only around 1.0 percent, currently below the level that would be consistent with meeting the BOE's inflation target.
In addition, the rise in sterling's exchange rate from mid-2013 to July 2014 was still affecting prices of imported goods, the BOE said, adding that a combination of these factors meant that the average measures of core inflation remain subdued.
After rising against the U.S. dollar from mid-2013 to July 2014, the pound fell until mid-April this year before bouncing back. Today the pound was quoted at 0.647 to the U.S. dollar, largely unchanged since 0.641 at the start of the year.
Despite the risks to its growth outlook "skewed moderately to the downside" reflecting the weak outlook for the euro area and China, the BOE raised its 2015 growth forecast to a mean of 2.8 percent from May's forecast of 2.5 percent as "domestic momentum is being underpinned by robust real income growth, supporting credit conditions, and elevated business and consumer confidence."
For 2016 the BOE's policy report maintained its forecast for 2.6 percent growth while it raised it for 2017 to 2.5 percent from 2.4 percent.
The Bank of England issued the following statement:
"Monetary policy summary