Weekly UK rates review

The MPC surprised no one by keeping the policy rate unchanged and maintaining an 8-1 vote split, with external member Ian McCafferty remaining the sole dissenter. At his Jackson Hole speech, Governor Carney was measured about his outlook for China and the risks the country might pose for the UK economy. The committee sees the risk to the near-term economic outlook as skewed to the downside, reflecting developments in the euro area and China, resulting in the MPC cutting its Q3 15 forecast by 0.1pp to 0.6% q/q. 

The Minutes report that for the majority of the Committee who had voted to keep rates on hold, some were members who continue to see upside risk to the CPI target. This would be consistent with the view outlined in the August Inflation Report that the modal inflation forecast had the probability of inflation being above 2% at the 1.5-2y horizon at about 50%, as well as being on a rising path. However, this perception of upside risk is shared by neither the market nor the collective opinion of forecasters.  

It is too simplistic to think of market forward inflation expectations as a "forecast" of inflation; rather, it can be a measure of the inflation "compensation" demanded by investors. However, they can indicate the degree of inflation expectations becoming deanchored from the central bank's inflation target. In contrast, 1y2yf and 1y3yf expectations remain more stable and, thus, more consistent with the inflation target. The Minutes note that the Committee still believes that domestic wage pressures are not yet strong enough to deliver the sustained rise in domestic inflation necessary to counteract the drag of the weaker external environment.