Bank of England split on Mark Carney plan as inflation worries grow

Calls for tougher constraints on move to stick to ultra-low borrowing costs until the unemployment rate falls to 7%

Splits over Bank of England Governor Mark Carney’s landmark forward guidance strategy emerged today as a dissenter expressed “compelling” fears over spiralling inflation.

Martin Weale, among the monetary policy committee’s hawks after previous votes for interest rate rises, called for tougher constraints on Carney’s plans to stick to ultra-low borrowing costs until the unemployment rate falls to 7%, minutes of the committee’s meeting two weeks ago showed.

One of the three “knockouts” for the guidance is triggered if the MPC considers it likely that inflation will be half a percentage point or more above its 2% target in 18-24 months.

But the minutes revealed that although “supportive” of guidance, Weale saw a “particularly compelling need to do more to manage the risk that forward guidance could lead to an increase in medium-term inflation expectations”.

The rate-setter wanted an “even shorter time” horizon to convince financial markets that the Bank’s initiative was compatible with hitting its 2% inflation target. The Bank’s Consumer Prices Index benchmark stands at 2.8%.

Jeremy Cook, chief economist at foreign exchange firm World First, said of Weale’s stance: “This is a nod to the Bank’s mandate as an inflation controller, not that it means much at the moment, given they have not been within driving distance of target for a long time.”

The minutes also made clear that some MPC members, likely to be David Miles and Paul Fisher, still think the case for more money-printing “remained as compelling as in July” although they are holding fire on votes for more quantitative easing to assess the impact of forward guidance on financial market prices. But the pound has strengthened and the UK’s long-term borrowing costs risen as the latest strong data from the jobs market revealed a 29,200 fall in the claimant count last month, which is likely to feed into bringing the unemployment rate down towards the 7% guidance threshold.

Most members are opposed to more QE but made clear the strategy remains on the table if yields push higher.

Vicky Redwood, chief UK economist at Capital Economics, said: “With gilt yields rising further after this release,  after steady increases yesterday, the MPC may have to take further action to head off what it has termed the “unwarranted” rise in market rate expectations.”