The Bank of England raised the chances of an August rate rise after its chief economist joined two other members of its rate-setting monetary policy committee voting for an immediate hike in borrowing costs.
For the first time since joining the MPC four years ago, Andy Haldane broke ranks with the majority on the nine member rate-setting panel to join Ian McCafferty and Michael Saunders in calling for an increase in interest rates. The move is likely to heighten speculation that Threadneedle Street could be gearing up for a rise in two months’ time.
On the foreign exchanges, the pound, which had been down against the dollar at $1.31 before the announcement, rallied to $1.3220, a gain of half a cent.
The latest rate decision comes after the Bank delayed raising the cost of borrowing last month amid the weakest readings of health for the economy in five years, which had been triggered by heavy snowfall. The “beast from the east” meant cranes and diggers fell idle and forced shoppers to stay at home, causing growth to slow to 0.1% in the first three months of the year.
The Bank said in May it thought the slowdown was a blip the economy would recover from and reiterated that view on Thursday.
“This judgment appears broadly on track. A number of indicators of household spending and sentiment have bounced back strongly from what appeared to be erratic weakness,” the MPC said.
Although Mark Carney, the Bank’s governor, was among the majority voting for rates to remain at 0.5% this month, the MPC said if the economy were to develop broadly in line with its projections, “an ongoing tightening of monetary policy over the forecast period would be appropriate”.
One of Gordon Brown’s first moves as chancellor in 1997 was to hand control of interest rates to an independent Bank of England. Previously the cost of borrowing had been decided between the chancellor and the governor of the Bank.
Rates are set by the Bank’s monetary policy committee (MPC), which consists of nine members – the Bank of England governor, the three deputy governors for monetary policy, financial stability and markets and banking, the chief economist and four external members appointed directly by the chancellor.
The four external members are appointed to bring thinking and expertise from outside the Bank to the meetings. A Treasury representative also attends the meetings and can discuss policy issues but is not allowed to vote.
The committee meets monthly to discuss whether to cut, raise or leave interest rates unchanged, as well as other measures such as quantitative easing. The decisions are made after a vote by each committee member; in the event of a tie, the governor has the casting vote.
Minutes of the meetings are published after the rates decision has been announced.
Haldane has disagreed publicly with the governor before. The last time a chief economist voted against the majority on the MPC was in 2011, when Spencer Dale held the post.
Analysts said the split of three in favour versus six against will stoke speculation for an August interest rate rise, although much will depend on how the economy performs over the coming months.
Ruth Gregory, the senior UK economist at the consultancy Capital Economics, said the Bank could raise interest rates in August and again in November, taking the cost of borrowing to 1% before the end of the year. “We doubt that the MPC will sit on its hands for too much longer,” she said.
Having eased monetary policy to stimulate the economy and promote job creation after the financial crisis, including through £435bn of quantitative easing, the tone from the MPC’s latest meeting continues the Bank on a path of slowly tightening the money supply just as Britain prepares to leave the European Union. Businesses warn this could be a risky strategy, given the uncertainty over the outcome for the talks with Brussels.
Tej Parikh, a senior economist at the Institute of Directors, said: “The MPC risks dampening confidence with a premature rate hike, particularly while political noise continues to bring uncertainty for businesses.”
Since its last meeting, Threadneedle Street also said it had reassessed the point at which it could begin reducing its quantitative easing bond buying programme. Instead of interest rates needing to rise to about 2% as the Bank had previously argued, they would now only need to reach about 1.5% it said, although the ultimate decision would depend on the strength of the economy.
The interest rate decision comes before Carney gives his penultimate Mansion House speech in the City of London on Thursday night, alongside the chancellor, Philip Hammond, and it will also be watched closely for clues over the Bank’s future policy decisions.
Jeavon Lolay of Lloyds Bank said: “The surprising switch by Bank of England chief economist Haldane to support an immediate rate hike puts August firmly on the table. There will be even more interest in what governor Carney says tonight at the annual Mansion House speech.”
