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Carney Faces Breakdown of BOE Consensus on Interest Rates

Bank of England Governor Mark Carney
Bank of England Governor Mark Carney. Photographer: Chris Ratcliffe/Bloomberg

For Bank of England Governor Mark Carney, a year of harmony on interest rates may be about to end.

The consensus since he took over last July might soon splinter as Britain notches up the fastest growth within the Group of Seven. After 35 straight meetings without dissent -- 12 of them under Carney -- the nine-person Monetary Policy Committee kept the benchmark rate at a record low today in what economists from Deutsche Bank AG to Goldman Sachs Group Inc. say was probably its final unanimous decision.

“The bank will have to move to a more neutral level of interest rates at some point and some of the voters think that process should start sooner,” said Rob Wood, an economist at Berenberg Bank and a former BOE official. “This could well be the last decision that is unanimous for a while.”

Berenberg predicts one of the MPC will break ranks as soon as next month. Minutes of the June meeting showed policy makers thought the case for higher borrowing costs was becoming “more balanced,” and that investors were underestimating the risk of an increase this year.

The MPC left the key rate at 0.5 percent, as forecast by all 47 economists in a Bloomberg survey. Minutes of the two-day meeting, revealing how each member voted, will be published July 23.

Tighter Conditions

The benchmark rate has been at the same level since March 2009. The last time officials split on borrowing costs was in 2011, when Martin Weale and Spencer Dale pushed for a quarter-point increase to battle inflation pressures.

While a shift is emerging, it may take until February -- a month when the BOE produces new quarterly forecasts -- for a majority of policy makers to back higher rates, traders are betting.

Speculation rates could rise before year-end has already led to a tightening of financial conditions by driving up the pound and government bond yields, handing ammunition to officials including Carney who urge caution.

The two-year yield has gained 26 basis points this year to 0.82 percent. The pound has appreciated more than 11 percent in the past 12 months, the best performance among 10 major currencies tracked by Bloomberg Correlation-Weighted Indexes. It reached 79.15 pence per euro on July 7, the strongest level in almost two years.

Growth Momentum

“We do not expect a minority vote for higher rates until the August Inflation Report round, at least,” Kevin Daly, an economist at Goldman Sachs in London, wrote in a note this month. “All members have also indicated that they would need to see more evidence of slack being absorbed before voting for a rate hike.”

Recent data suggest the recovery is maintaining its momentum, with unemployment sliding to the lowest level in more than five years in April. The National Institute of Economic and Social Research estimates gross domestic product grew 0.9 percent in the second quarter, the fastest since 2010. Countering that, inflation stayed below the 2 percent target for a fifth month in May and real wages are continuing to fall.

The debate over rates centers on spare capacity -- the economy’s scope to grow without setting off faster inflation. Testifying to lawmakers yesterday, BOE Deputy Governor-designate Nemat Shafik said the pace of recovery is “striking” and the central bank will probably revise down its estimate of slack when it revisits its predictions next month.

New Officials

Shafik, who will cast her first vote in August, is one of three new officials to join the rate-setting committee in the past few months, with Andrew Haldane becoming chief economist in June and Kristin Forbes starting as an external member this month.

“There’s a significant chance in the next few months that Weale will break ranks,” said Brian Hilliard, an economist at Societe Generale SA in London and a former BOE official. “What will slow down the division within the MPC is the change of guard. You’ve got a lot of new members, who obviously are independent, but I can’t see them voting against their new boss for a while.”

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