First Bank of England split over interest rate rises in three years
The first division in three years over rate rises in the Bank of England’s Monetary Policy Committee emerged yesterday as official minutes showed two members voted in favour of increasing the cost of money earlier this month.
Martin Weale and Ian McCafferty, external members of the nine-person panel, pushed for rates to be lifted by 0.25 per cent from their historic lows of 0.5 per cent.
The minutes showed that the pair felt rapid falls in headline unemployment and survey evidence of tightening in the labour market was likely to indicate a return of inflationary pressure which warranted immediate action. They also said that it was “unclear” whether the financial risks of raising rates were more significant than leaving them on hold.
Nevertheless, the seven other members of the MPC, including the Governor, Mark Carney, voted to keep rates on hold, with the minutes recording a variety of justifications.
This is the first time that an MPC vote on interest rates has not been unanimous since July 2011. In that month Mr Weale and Spencer Dale, the former chief economist, voted for a quarter-point increase as consumer price inflation breached 4 per cent. But three months later the committee voted unanimously to restart its quantitative easing programme as the eurozone crisis worsened.
The news of the split on the MPC lifted sterling half a cent against the dollar to $1.6678, although it later fell back to $1.6622. Overnight interest rate swap rates showed traders bringing forward their bets on the likely first date of the next interest rate rise to five months’ time.
But analysts said that there was little prospect of a majority for rate rises over the next few months. “We suspect that Mr Weale and Mr McCafferty will remain in the minority for a while yet,” said ING Bank economist James Knightley.
Consumer price inflation fell back to 1.6 per cent in July, down from 1.9 per cent in June, according to the Office for National Statistics this week. That was lower than the 1.8 per cent the Bank forecast for the third quarter in its latest Inflation Report and below its official 2 per cent target.
In last month’s Inflation Report the Bank halved its forecast for average wage growth, saying it now expects average salaries to rise by just 1.25 per cent this year. Recent official data also showed average wages, excluding bonuses, grew by just 0.6 per cent in the year to June, the slowest pace of growth since records began in 2001.
Other data in the economy yesterday was mixed. The latest industrial trends survey showed a positive balance of 11 in August, up from +2 in July and higher than the +4 analysts were expecting. “The outlook for UK manufacturers remains healthy,” said Katja Hall, deputy director general of the CBI.
But there were also further signs that the housing market continues to power ahead, with the Council of Mortgage Lenders (CML) reporting yesterday that gross mortgage lending rose 15 per cent year on year in July. The £19.1bn in new loans was the highest monthly lending figure since August 2008.
Caroline Offord of the CML said that while property transactions were increasing compared with last year, she expected “intensifying affordability pressures could start to dampen this upwards trend”.
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