8th August 2015 by Simon Ward
Bank of England Governor Mark Carney managed to suppress hawkish dissent at the August MPC meeting but the latest Inflation Report forecast creates a strong presumption in favour of an interest rate rise before year-end.
It was always unlikely that more than one or two mavericks would defy Governor Carney’s recent signal that it would be premature to act before “the turn of the year” by voting for a hike in August. The silent hawks got their revenge by pushing through a rise in the inflation forecast two to three years out, putting them in a solid position to carry the day in November, barring downside data surprises or adverse financial market developments.
The best summary measure of the MPC’s collective view is the mean forecast for inflation in two years’ time based on unchanged policy. This was raised sharply from 2.35% in May to 2.60% in August. The 0.6 percentage point overshoot relative to the target is the largest positive deviation in the MPC’s 18-year history and sends a clear signal that rates need to start rising soon if the path back to neutral is to be “gentle”, as Governor Carney has promised.
Sterling initially fell on today’s news, with the market giving more weight to the 8-1 August vote than the hawkish forecast – wrongly, on the assessment here.
(A monetarist gripe: The structure of the Inflation Report has been changed, with a previous chapter on “Money and asset prices” replaced with “Global economic and financial developments”. There is no reference to money anywhere in the book – striking even by the Bank’s standards.)