Pound moves higher after split Bank of England decision over rate hike

Two top Bank of England officials voted this month to increase the cost of borrowing

Sterling edge higher today as the Bank of England’s hawks found their claws for the first time in more than three years, saying that the UK’s recovery was strong enough “to justify an immediate rise” in interest rates.

News of Martin Weale and Ian McCafferty’s vote for dearer money — the first dissent on interest rates since July 2011 — rippled through financial markets following the release of the minutes of the Monetary Policy Committee’s August meeting.

Sterling gained half a cent against both the dollar and the euro, to $1.6679 and €1.2525 respectively, immediately following the release of the minutes but cooled later as the pair’s votes for a quarter-point rise to 0.75 per cent was not a complete bolt from the blue for the City.

Bond markets sold off slightly, pushing up yields on the UK’s benchmark 10-year debt — which moves in the opposite direction to prices — by 2.8 basis points to 2.428 per cent.

Bank of England Governor Mark Carney presided over a dovish inflation report last week, at which he put the prospect for so-far anaemic wage growth at the centre of the debate over the timing of any interest rate rises.

But Weale and McCafferty are concerned that rises in wages are lagging the stellar turnaround in the jobs market over the past year and argued that the Bank needs to act in advance of looming rises in pay as slack is used up and the jobs market tightens.

“Since monetary policy, too, could be expected to operate only with a lag, it was desirable to anticipate labour market pressures by raising Bank Rate in advance of them,” the minutes read.

Inflation however remains benign at 1.6 per cent in July — still well below the Bank’s 2 per cent target — meaning that “for most members, there remained insufficient evidence of inflationary pressures” to justify an interest rate rise.

“We suspect that Weale and McCafferty will remain in the minority for a while yet,” ING Bank economist James Knightley said.

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