Two Bank of England officials backed interest rate rise
Minutes from bank’s August meeting suggest prospect of rate rise before end of year
Mark Carney, governor of the Bank of England, gestures during the bank’s quarterly inflation report news conference in London earlier this month. Photographer: Simon Dawson/Bloomberg
The prospect of an interest rate hike in Britain before the end of the year was reopened today as it was revealed that two members of the Bank of England’s monetary policy committee (MPC) voted for a 0.25 per cent rise this month.
Minutes from the MPC’s August meeting showed that Ian McCafferty and Martin Weale argued that improvements in the economy meant it was time for an increase.
It was the first split vote on rates since July 2011 and broke the consensus under governor Mark Carney in which all of the main monetary policy decisions since he took charge last summer have been unanimous.
Economists said the dissent meant the door was left open for a possible interest rate hike before the end of this year — a possibility that only a day earlier had seemed to fade as figures showed inflation dropped sharply to 1.6 per cent in July.
Markets have pencilled in the most likely timing for a rise as next February but the pound rose a cent against the euro today as currency traders recalibrated the probability of it happening earlier. It was also up against the dollar. The likelihood of a rise this year has appeared to ebb in recent days because of falling inflation and last week’s figures showing a 0.2 per cent fall in pay — the first decline since the height of the recession in 2009.
At the same time the Bank of England said it would take greater account of pay when deciding when it should raise rates. Today’s minutes, from the MPC meeting of August 6th and 7th, saw members vote 7-2 in favour of maintaining rates at 0.5 per cent where they have been for more than five years, after they were slashed to try to help the economy back to health. Prospects of an increase have risen with the improving economy. Policy-makers on the committee must weigh up the need to keep a lid on inflation without snuffing out the recovery.
The minutes said: “For two members, in particular, economic circumstances were sufficient to justify an immediate rise in Bank rate.”
Mr McCafferty and Mr Weale argued that despite weak pay growth, the Bank’s actions ought to anticipate its inevitable rise, adding that a rate of 0.75 per cent would still be “extremely supportive” to the economy. They suggested a small rise now would help the MPC stick to its aim of making only gradual hikes later.
The majority felt that “there remained insufficient evidence of inflationary pressures” to justify an increase. Some argued that, given the concerns that weak pay growth would continue for longer, “there would be merit in waiting to see firmer evidence that solid increase in pay growth were in prospect before tightening policy”.
Another reason for leaving the status quo for now was that “increases in Bank rate well ahead of any pick-up in wage and income growth risked increasing the vulnerability of highly-indebted households”. There was an acknowledgement that burgeoning growth meant the time for the rate rise was nearing as “the longer the expansion continued, the less likely it became that some of the downside risks to growth and inflation would appear”. The split was the first on the MPC on either rates or quantitative easing (QE) - which injects billions into the economy — since Mr Carney became governor last summer.