According to the BoE, one should be cautious when drawing out too many major trends from the short-term developments, especially given that some volatility is expected when such a complex economic transition as that going on in China is being undertaken.
But, it did highlight that: “the combination of slower growth in Chinese demand, weak commodity prices and the prospect of monetary tightening in the United States was likely to have an adverse effect on a number of emerging economies, whose importance in the world economy had grown significantly in recent years.
However, while the “increased anxieties about prospects for China and other emerging markets had underlined the downside risks to global activity that the MPC had described in the August Inflation Report”, for eight members, August’s gyrations were insufficient to change their view on interest rates. And, as a result, the MPC voted eight to one to keep rates on hold. Ian McCafferty remained the sole dissenting voice.
According to the minutes, the eight members voting to keep rates steady thought “it would be premature to draw strong inferences from this month’s events for the likely path of activity in the United Kingdom”.
The MPC members said that, while uncertainty about the near-term path of inflation had increased, a pickup around the turn of the year remained likely. On the one hand further oil price weakness helped surpress inflationary impluses, while on the other, there were increased signs over the month that core inflation might be firming.
“It remained unclear to what extent lower unemployment would translate into accelerating unit wage costs. There was also considerable uncertainty about the extent of pass-through from movements in the exchange rate to inflation. Some of these members nevertheless saw continued upside risks to inflation relative to the target,” the minutes revealed.
McCafferty, however, felt the risks were sufficient to justify an immediate increase in Bank Rate.
In his view, “The outlook for private domestic demand growth was robust, with consumer and business confidence at high levels. Labour market indicators suggested a degree of tightness that was likely to generate more rapid growth in pay than in the Committee’s August Inflation Report central forecast, adding to other signs that underlying inflationary pressures had begun to build.”
