The Bank of England’s Monetary Policy Committee came its closest to voting for a rate rise since 2007 this week, after the central bank unexpectedly said three of its policymakers backed increasing interest rates.
External MPC members Ian McCafferty and Michael Saunders joined existing rate rise advocate Kristin Forbes in calling for a reversal of the BoE’s decision last August to cut rates to 0.25 per cent.
Bank of England Governor Mark Carney and four other policymakers voted to leave rates unchanged.
Economists polled by Reuters had expected only Forbes – whose term on the MPC expires at the end of the month – to back higher rates, especially given a slowdown in growth in the first three months of 2017.
The central bank said a jump in inflation last month to 2.9 per cent meant it was likely to exceed 3 per cent this autumn – higher than the BoE forecast just a few weeks ago and well above its 2 per cent inflation target.
Moreover, a fall in the pound after Prime Minister Theresa May failed to win a majority in last week’s election could push prices yet higher, the central bank said.
Britain’s economy slowed sharply in the first quarter of this year as the effect of higher inflation caught up with consumers at a time of sluggish wage growth.
But the central bank said it was unclear how persistent this weakness would be, as consumer confidence remained solid. Moreover, indicators of investment and exports looked upbeat, the BoE said “The continued growth of employment could suggest that spare capacity is being eroded, lessening the trade-off that the MPC is required to balance and, all else equal, reducing the MPC’s tolerance of above-target inflation,” the BoE said.
“Looking ahead, key considerations in judging the appropriate stance in monetary policy are the evolution of inflationary pressures, the persistence of weaker consumption and the degree to which it is offset by other components of demand.”
The last time three MPC members voted for a rate rise was in 2011 – when there were nine members serving on the MPC – and the last time a single vote could have swung the decision on rates was in June 2007 when the committee split 5-4.
The U.S. Federal Reserve ?? raised American interest rates late on Wednesday and – notwithstanding some softening domestic data – signalled it is like to raise rates once more this year.
Later on Thursday BoE Governor Mark Carney is due to give a speech to London bankers alongside Chancellor of the Exchequer Philip Hammond, who is expected to focus on Britain’s future EU ties.
Due to election campaigning, Hammond has not yet announced a replacement for U.S. academic Forbes – whose three-year term at the BoE expires at the end of the month – or for Charlotte Hogg, who has left the central bank after lawmakers criticised her failure to declare potential conflicts of interest.
Most economists polled by Reuters do not expect a rate rise until 2019. The outlook is clouded by uncertainty about whether May will be able to lead a stable government as she tries to negotiate an exit deal with the EU and navigate complex legislation through parliament.
She unexpectedly lost her parliamentary majority in an election last week – heavily damaging her standing with party colleagues – and is trying to get a commitment of support for Northern Ireland’s main pro-British party.Report Typo/Error