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‘Deflationary spiral’ fears blocked BoE interest rate hike

Fears of a “deflationary spiral” moved some members of the Bank of England’s Monetary Policy Committee to vote against an increase in interest rates in January.

Writing in the Observer this weekend, MPC member Martin Weale said he had consistently voted in favour of hiking the Bank’s 0.5 per cent base rate since August, but changed his mind in light of falling oil prices.

The Bank said last week the declining value of oil was the biggest driver behind reductions in the cost of living, with inflation set to dip to negative levels in Spring before returning to 0 per cent in Q2 and Q3.

Weale said inflation will likely stay low until at least a year after a sharp drop in oil values.

“If very low expectations of inflation were to become entrenched there would be a risk that the economy would sink into a deflationary spiral,” Weale said.

“Wages and prices could fall, people might put off spending if they thought things would be cheaper in the future, and they would find that, even though interest rates were very low, their mortgage became a burden which was difficult to manage.

“This could lead to lower spending, prompting further deflation and weak economic growth.”

Weale added that the Bank remains open to the idea of further quantitative easing or cutting the base rate below 0.5 per cent.

“So why have we neither cut Bank rate nor made further asset purchases as the inflation rate has dropped?” he asked.

“The answer is that, as things stand, the committee expects inflation to return to target in two years without further help, as the impact of cheap oil drops out of the inflation numbers and the current economic expansion continues.”

Nonetheless, Weale said current Bank forecasts show inflation rising above target by mid-2017.

“In my own view, rates will also have to rise somewhat earlier than market participants currently expect,” he said.



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There is one comment at the moment, we would love to hear your opinion too.

  1. “In my own view, rates will also have to rise somewhat earlier than market participants currently expect”

    Why pray tell Martin? What possible reason does the MPC have to raise rates before inflationary pressure have informed businesses decision making. It sounds awfully like you’re attempting to justify your existence. There’s no shame in saying there’s nothing we can or should be doing right now.

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