News Column

Bank of England split on interest rates reopens prospect of a rise in 2014

August 21, 2014

Larry Elliott,

The first increase in interest rates from the Bank of England since 2007 has moved a decisive step closer after two members of Threadneedle Street's key policy committee broke ranks and voted for dearer borrowing.

Minutes of the meeting of the Bank's monetary policy committee meeting show that two of the nine members – Martin Weale and Ian McCafferty – called for rates to be pushed up by a quarter point to 0.75%.

Although the other seven members of the MPC said weak earnings growth, below-target inflation, and the fragile finances of some households warranted keeping rates unchanged, the August meeting was the first time since 2011 that the MPC has not voted unanimously on rates.

The City had been expecting another 9-0 vote in favour of keeping borrowing costs at 0.5% and the pound rose by half a cent against the dollar shortly after the minutes were published, as dealers anticipated more MPC members joining Weale and McCafferty over the coming months.

According to the minutes, the two dissenting MPC members said the state of the economy justified an immediate rise in the bank rate.

"These members noted that the continuing rapid fall in unemployment alongside survey evidence of tightening in the labour market created a prospect that wage growth would pick up. They noted that it was possible that wages were lagging developments in the labour market to some extent. If that were true, wages might not start to rise until spare capacity in the labour market were fully used up. Since monetary policy, too, could be expected to operate only with a lag, it was desirable to anticipate labour market pressures by raising Bank Rate in advance of them."

Interest rates have been pegged at 0.5% – the lowest level in the Bank's 320-year history – since early 2009 but McCafferty and Weale said that even after their proposed 0.25- point rise policy would be highly supportive of growth. An early rise would help ensure that increases in borrowing costs were gradual.

The Bank's governor, Mark Carney, had signalled a split on the MPC during last week's Inflation Report press conference, in which he said that there were differing views on the committee about the amount of slack still remaining in the economy following the deep recession of 2008-09.

But he was among the majority on the committee that decided "there remained insufficient evidence of inflationary pressures to justify an immediate increase in Bank Rate".

Those voting for no change in August said "growth was likely to ease a little as the boost from pent-up demand released by the easing in credit conditions and lifting of uncertainty faded. This would slow the pace at which slack was being eroded. Wage growth remained weak, suggesting that slack in the labour market might have been greater than previously thought.

"In addition, increases in Bank Rate well ahead of any pickup in wage and income growth risked increasing the vulnerability of highly indebted households. Finally, an unexpected increase in Bank Rate might cause sterling to appreciate further, bearing down on inflation and further impeding UK economic rebalancing."

Samuel Tombs, UK economist at Capital Economics, said: "The minutes of August's UK MPC meeting, revealing the first split vote on interest rates since July 2011, suggest that it would be foolish to rule out the possibility of a 2014 rate hike."

James Knightley, UK economist at ING, said: "We suspect that Weale and McCafferty will remain in the minority for a while yet. Yesterday's low inflation numbers, the lack of wage growth and concerns about Eurozone growth – the UK's largest trade partner, suggest that in the absence of upside activity data shocks the majority will continue to opt for the status quo in the next few months. Indeed, it currently looks more likely to be February when we see the first rate rise than our current published forecast of November."

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Source: Guardian Web

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