As two of the world’s biggest central banks diverge, the Bank of England is caught in the middle.
These charts show how the environment has evolved since the Monetary Policy Committee’s last meeting on Nov. 5. The nine-member panel, led by Governor Mark Carney, will announce its latest decision at noon in London on Thursday, and economists forecast they will leave the key rate at 0.5 percent.
The meeting follows the European Central Bank’s move last week to loosen policy, and precedes a U.S. Federal Reserve meeting next week that may see officials increase their key rate for the first time since 2006. The BOE will also publish minutes of its decision and a policy statement showing how officials voted and their latest assessment of the domestic and global environment.
For economists, the central bank is set to tread a path between the Fed and the ECB all through next year.
In November, officials highlighted the weaker outlook for emerging markets and said the U.K. was “vulnerable to a sharper slowdown.” Since then investors have become a bit less concerned about global risks:
In November, most MPC members said underlying inflationary pressures weren’t strong enough to justify an increase in the bank rate. Inflation is still stuck around zero and wage growth has cooled. Remember, the BOE cut its forecasts last month:
More broadly: real-pay growth has persisted for more than a year, entrenching consumers’ spending power and supporting the prospect that the strength in domestic demand will continue.
Carney said in an interview with Bloomberg News after last month’s decision that it’s important to monitor core inflation. While the headline rate has hovered around zero for most of this year, core, which excludes energy, food, tobacco and alcohol prices, has been higher. They’re both still below the BOE’s 2 percent target.
The commodity-price drop this year explains some of the persistence of low inflation. Oil fell to a six-year low in London this week. The BOE said in November that the declines in energy prices in the past few months will bear down on price growth at least until the middle of next year.
A strong pound has also helped keep a lid on prices.
Last month Ian McCafferty was alone in voting for a 25 basis-point increase to the key rate, citing the risk that domestic costs will begin to rise more rapidly than the bank expects. While the MPC judged the economy to be “resilient” in November, recent reports have been mixed. Purchasing-managers indexes showed manufacturing and construction cooled last month and services accelerated.