News Column

REPEAT: BoE Split On Rates For First Time In More Than 3 Years

August 20, 2014



LONDON (Alliance News) - Bank of England policymakers split on rate decision this month, for the first time in more than three years as two members said the current economic situation warrant an immediate rate hike from a historic-low.

At the August Monetary Policy Committee meeting, Ian McCafferty and Martin Weale sought a quarter-point hike in the bank rate to 0.75%, while all other seven members voted to keep the rate unchanged at 0.50%.

Members were unanimous on holding the rate at 0.50% since July 2011.

Regarding the stock of purchased assets, the nine-member board unanimously voted to leave the the programme unchanged at GBP 375 billion.

External members McCafferty and Weale said economic circumstances were sufficient to justify an immediate rise in the Bank Rate. Their arguments sparked market expectations for an action this year itself.

Even after a rise of 25 basis points in the Bank Rate, dissenters said monetary policy would remain extremely supportive, and an early rise would facilitate the MPC's aspiration that the rate hikes should be only gradual.

Also, they observed that the wage growth was a lagging indicator of the amount of slack in the economy and it would be desirable to begin raising rates before all the slack had been used up.

However, for most members, there remained insufficient evidence of inflationary pressures to justify an immediate increase in Bank Rate.

Members assessed that increases in the interest rate well ahead of any pickup in wage and income growth risked increasing the vulnerability of highly indebted household.

Moreover, an unexpected increase in the rate might cause sterling to appreciate further, bearing down on inflation and further impeding UK economic rebalancing.

Data released after the August MPC meeting showed inflation slowing to 1.6% in July from 1.9% in June. Wages declined in the second quarter for the first time since 2009, keeping a lid on inflation.

In the Inflation Report, released earlier this month, the bank lowered its outlook for the amount of slack in the economy to around 1% of gross domestic product. Earlier, the bank projected 1-1.5% spare capacity.

The latest low inflation numbers, the lack of wage growth and concerns about Eurozone growth, 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, James Knightley, an economist at ING Bank NV said.

But Samuel Tombs, a senior UK economist at Capital Economics, said it would be foolish to rule out the possibility of a 2014 rate hike.



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Source: Alliance News


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