BOE Sees 2016 Inflation Pickup as U.K. Labor Market Strengthens

The Bank of England said U.K. inflation may accelerate quickly in 2016 once the impact of plunging oil prices fades as wage and unemployment data showed labor-cost pressure is starting to build. 

With commodity prices and the past appreciation of the pound accounting for two-thirds of the current inflation weakness, the slowdown may prove temporary, the Monetary Policy Committee said in the minutes of its February meeting published Wednesday.

“Absent further such movements in commodity prices or sterling, the effects of these factors on 12-month CPI would dissipate towards the end of 2015, causing inflation to pick up towards the target fairly sharply,” it said.

The minutes also showed some divergence within the panel on when tightening should start. For two members, the decision to keep rates on hold at 0.5 percent this month was “finely balanced,” and there may be a case to increase rates later this year.

While the committee said the next most likely move in policy over the next three years was tightening, one said there was a “roughly equal” chance the next shift would be a policy loosening.

In a sign of a further strengthening in the labor market, the statistics office said unemployment fell to its lowest rate in more than six years in the fourth quarter.

The jobless rate based on International Labor Organization methods dropped to 5.7 percent from 5.8 percent in the period through November.

Pay grew 2.1 percent, outstripping inflation by the biggest margin since 2008. The pound strengthened after the reports were published and was up 0.5 percent at $1.5426 as of 9:36 a.m. in London.