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 a larger majority of the committee to opt to keep borrowing costs low to ease the pressure on households from a drop in living standards in the wake of last summer’s Brexit vote. It was the committee’s widest split since May 2011.
The financial markets had expected just one policymaker, Kristin Forbes, to maintain her previous vote for a rate rise to 0.5%. In the event she was joined by Ian McCafferty and Michael Saunders.
Their call for higher borrowing costs follows a rise in inflation to even further above the Bank’s 2.0% target. Data released on Tuesday showed that in May inflation hit 2.9%, driven in part by the pound’s weakness since the Brexit vote, which has made imports to the UK more expensive.
The pound got some support on Thursday from the prospect of higher interest rates but at $1.276 it is still down 14% against the dollar when compared with the night of the EU referendum a year ago.
The pound’s loss has been the FTSE 100’s gain, however, as weaker sterling has flattered the earnings of the many companies on the stock index that make money overseas. The FTSE fell after the Bank decision was announced and it closed down 55 points, or 0.7%, at 7419.36.
Since the Brexit vote the Bank’s committee of rate-setters has been forced into a balancing act between keeping import-fuelled inflation in check and providing support to the economy as uncertainty and a squeeze on incomes bites.
The five policymakers voting to leave interest rates on hold at June’s meeting, including the Bank’s governor, Mark Carney, appeared to be more worried about a slowdown in consumer spending as households grapple with rising prices and meagre wage growth.
Those factors have dented overall growth and left the UK economy trailing behind the world’s other advanced economies and all its European neighbours in the opening months of 2017.
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.
“But there were also arguments in favour of leaving the policy rate unchanged,” they added.
“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.”
All committee members agreed any rate rises would likely 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 will provide a fuller update on their thinking when they release quarterly economic forecasts and vote again on interest rates in August.
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.
“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,” he said.
But Ben Brettell, senior economist at financial firm Hargreaves Lansdown said policymakers appeared to be 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.
