BOE Says Interest-Rate Arguments Becoming ‘More Balanced’Scott Hamilton
The Bank of England said arguments in favor of the first interest-rate increase since 2007 are growing stronger for some officials.
As the economy recovers and the risk of a housing-market bubble grows, the Monetary Policy Committee said this month that decisions were becoming “more balanced” for some of its nine members. However, all agreed they needed to see “more evidence of slack reducing” before it would be time to increase the key interest rate from a record low. The MPC voted unanimously to keep the rate at 0.5 percent.
Minutes of their first meeting since the initial phase of forward guidance ended show that officials remain divided over the amount of spare capacity in the economy, which has become a key measure under Governor Mark Carney’s push to keep borrowing costs low. Previously, his guidance focused on unemployment, though that version was replaced after the jobless rate fell faster than forecast.
The panel noted the risk of financial imbalances, especially in the housing market, saying that such threats would first be tackled by the BOE’s Financial Policy Committee. An easing in mortgage approvals and signs of a shortage of property for sale were “noteworthy” in the context of “continuing buoyancy” in house prices, particularly in London.
“There are the first few embryonic signs that some of the MPC are questioning the sense in running ultra-loose policy when the economy is growing over 3 percent a year and the housing market is delivering double-digit price increases,” said David Tinsley, an economist at BNP Paribas SA in London. “This hasn’t got to a point yet where there is a serious split emerging. But over the next few meetings we do expect these discussions to evolve further.”
Tinsley said he “wouldn’t be surprised” if one or more MPC members voted to increase rates this summer.
The pound rose for a fifth day after the minutes were published and data showed retail sales surged 1.3 percent in April, more than economists forecast. Sterling advanced 0.3 percent to $1.6893 as of 12:21 p.m. London time.
The minutes reiterated comments by officials in recent weeks that that once rate increases start, the moves will be gradual and that borrowing costs are likely to remain below the historical average for some time.
The central bank said the MPC has a range of views about slack in the labor market and in companies, and that policy makers have a “variety” of opinions on the appropriate path of monetary policy.
“It could be argued that the more gradual the intended rise in bank rate, the earlier it might be necessary to start tightening policy,” the MPC said in the minutes of its May 7-8 meeting. “Against that, if productive potential were in part related to the level of demand, then the earlier policy was tightened, the greater the risk of incurring a substantial loss in foregone output.”
Investors are pricing in a rate increase in the first half of 2015, a view shared by economists in Bloomberg’s monthly survey of economists, published yesterday. Thirty-five percent of 46 respondents predict the BOE will increase rates in the first quarter of 2015 and 35 percent said it will wait until the three months ending June.
On the economy, the committee said the recovery looks “less fragile” and the global backdrop is “benign,” notwithstanding risks such as tensions in Ukraine. Officials said it remains to be seen how much the softening in mortgage approvals was due to new lending rules and prospective home sellers delaying marketing in the hope of getting a higher price. The panel said the FPC will consider the issues at its June meeting.
According to forecasts published last week, the BOE sees the U.K. growing 3.4 percent this year and 2.9 percent in 2015. It forecasts that inflation will average 1.8 percent in both years, below its 2 percent goal.
Sterling has gained more than 11 percent against the dollar in the past year. While the committee said this would put downward pressure on inflation over the next couple of years, there was a case to “look through” the temporary effects of exchange-rate movements.