20th August 2014
Two out of nine members of the Bank of England’s Monetary Policy Committee voted to raise interest rates in August. This is the first split in the MPC for three years. The minutes of the meeting from early August show Ian McCafferty and Martin Weale voted for a 0.25% rise to 0.75%.
However publication of the minutes comes on the heels of official data published on Tuesday which showed Consumer Prices inflation falling to 1.6% in July. The split votes has seen sterling strengthen this morning with increased expectations that rates could rise. But experts say the picture remains confused.
Tony Wilson, head of strategy at the foreign exchange specialists FEXCO, says: “After three years of uninterrupted unanimity, the first split has appeared among the Bank of England’s rate-setting grandees. All things being equal, such a strong hint that an interest rate rise is approaching should send the Pound surging. But Sterling’s immediate gains were quickly pared back, as the markets have yet to shake off the hangover left by Tuesday’s surprisingly large drop in inflation. With CPI comfortably below its 2% target and wage growth still weak, the Bank has no pressing need to use interest rates to tame inflation. As a result the MPC’s two dissenting hawks are likely to remain voices in the wilderness. Despite the Bank Governor’s mixed messages, the doves are still calling the shots and a rate rise is unlikely to come until early 2015.”
Andy Scott, spokesperson at HiFX, adds: “Martin Weale and Ian McCafferty, voted to increase rates to 0.75%. Both members felt that it was appropriate to raise rates before wage growth, driven by falling unemployment, took off and to avoid being behind the curve due to the lag in monetary policy. The majority of members, however, felt that there were insufficient inflation pressures for it to be worth taking the risk of raising rates. It’s surprising in a way to see members voting for rate hikes already given the external downside risks that have been appearing around the world; whether it’s weak economic growth or geopolitical risk along with soft inflation. Weale and McCafferty must feel a great deal of confidence about the U.K. economy’s ability to remain on its growth path and/or a great deal of concern about future inflationary pressures. After yesterday’s CPI number coming in at 1.6% and several economies seeing disinflation, there doesn’t appear an imminent threat of the latter.
“An initial 0.25% hike would, in reality, probably have little negative effect on the economy; but it’s more the symbolism of a hike that can cause spending to slow, households to cut back and businesses to become more cautious. It’s this tightrope that the Bank of England has to walk between keeping rates low to continue to support the economy after a deep recession and minimal growth, and raising rates to prevent a future build-up of inflationary pressures that would force them into raising rates at a quicker pace than they’re planning.
“Sterling’s reaction was quite interesting as it jumped to day highs against the U.S. dollar and the euro at 1.6678 and 1.2545 respectively, before weakening somewhat. A month or two ago, before Carney proved he likes to provide forward guidance for certainty mixed with additional conditions along the way as he deems necessary, sterling would have jumped higher and likely moved higher through the day. Now though, the markets seem to be saying ‘we’re not going to get too caught up in the idea of a rate rise since we’re a lot less certain of one’. Carney, at least in the markets’ eyes, appears to be unreliable or at best inconsistent.”
Laith Khalaf, senior analyst, Hargreaves Lansdown said: “The plot twists in the interest rate saga are coming thick and fast. This is the first time in more than three years that any member of the committee has voted to increase rates and is a significant sign of dissention in the ranks. It may yet be premature to start counting your chickens however. The last time the committee vote was split was in July 2011, shortly before the Eurozone crisis kicked interest rate rises into the long grass. Yesterday’s inflation data and continuing anaemic wage growth may also put somewhat of a dampener on the enthusiasm for rate rises. Savers should also note that the proposed increase is just 0.25%, hardly enough to relieve the pressure on deposit rates felt by those holding cash in the bank.”