(qlmbusinessnews.com via theguardian.com – – Thur, 15 June, 2017) London, Uk – –
The Bank of England has edged closer to raising interest rates as a deeper split emerged among its committee of policymakers, with three out of eight voting for an immediate rise to keep inflation in check.
The 5-3 split to keep interest rates at their record low of 0.25% surprised financial markets and the pound rose against the dollar on the news. Most City economists had expected just one member, Kristin Forbes, would maintain her previous vote for rates to be raised to 0.5%. Instead she was joined by Ian McCafferty and Michael Saunders.
Their call for higher borrowing costs follows figures that show inflation has risen further above the Bank’s target of 2.0%. In May inflation hit 2.9%, as measured by the consumer prices index. The increase was driven in part by the pound’s weakness since the Brexit vote, which has made imports to the UK more expensive.
The other five members of the monetary policy committee (MPC), including the Bank’s governor, Mark Carney, decided interest rates should stay at their historically low level to help support growth at a time of rising prices and meagre wage growth. The drop in living standards has hit consumer spending and knocked overall economic growth. Figures on Wednesday showed workers were experiencing the biggest pay squeeze since 2014.
Minutes from the Bank’s rate-setting meeting released on Thursday cited a range of views on the MPC. They noted inflation was now expected to overshoot the Bank’s target by more than previously expected. Supporting those voting for a rate rise, there were also signs that growth in business investment and net trade was on track to make up for weaker consumption.
The minutes added that some policymakers felt it was time to start scaling back the massive package of support launched after last summer’s EU referendum, which included a rate cut and more electronic money printing.
“The withdrawal of part of the stimulus that the committee had injected in August last year would help to moderate the inflation overshoot while leaving monetary policy very supportive,” the minutes said.
“But there were also arguments in favour of leaving the policy rate unchanged. A slowdown in household consumption, and GDP as a whole, had recently begun, and it was too early to judge with confidence how large and persistent it would prove to be … Wage growth had remained subdued, despite low unemployment.
“Different members of the committee placed different weights on these arguments. On balance. For five members, the current policy stance was still appropriate to balance the demands of the committee’s remit. For three members, the outlook now justified an immediate increase in bank rate.”
All committee members agreed that any rate rises would be expected to be at a gradual pace and “to a limited extent”.
One seat on the committee was empty – the result of Charlotte Hogg’s resignation as deputy governor after it emerged she had breached the Bank’s code of conduct. Forbes leaves the MPC later this month and investors are awaiting an announcement on her replacement.
Policymakers, led by Carney, will provide a fuller update on their thinking when they release quarterly economic forecasts and vote again on interest rates in August. Before Thursday’s split vote most economists had said they expected the MPC to continue looking past above-target inflation and instead to favour supporting jobs and growth by keeping interest rates at their record low as Britain embarks on Brexit talks.
James Knightley, a senior economist at the bank ING, said he still expected a majority of policymakers to tolerate higher inflation in favour of shoring up the economy, as had been the case when inflation went well above target in the past.
“Given the BoE ‘looked through’ inflation at 5%+ rates in 2008 and 2011, we think the committee as a whole will look through this spike too,” he said.
“The economic and political uncertainty, we believe, is too great to get a consensus behind higher rates and with Kristin Forbes leaving the BoE this month, the hurdle to getting that consensus will soon be harder to achieve.”
But Ben Brettell, senior economist at financial firm Hargreaves Lansdown said the MPC minutes showed policymakers were more optimistic than many economists about the UK’s prospects.
“It seems the willingness of the MPC to ‘look through’ higher inflation and leave rates on hold is wearing thin, and if inflation continues to surprise we could see higher rates by the end of the summer,” he said.
By Katie Allen
