BOE Vote 9-0 as Some MPC See Lower Risks From Rate Increase

The Bank of England said some members of its Monetary Policy Committee have started to argue that the risk of a rate increase undermining the recovery has diminished as growth becomes more entrenched.

The nine-member panel led by Governor Mark Carney “would have the opportunity to consider in more depth” labor-market indicators before next month’s gathering when new forecasts would be reviewed. Officials voted unanimously to keep the benchmark rate at a record-low 0.5 percent, according to minutes of the July 9-10 policy meeting published in London today.

With the economy heading for a sixth consecutive quarter of growth and gross domestic product set to return to levels last seen before the financial crisis, officials’ focus is shifting to the timing of the first rate increase in seven years.

“Members had no preset timing for the first increase in bank rate, which would be driven by the data,” the minutes said. “On one interpretation, the risk of a small rise in bank rate derailing the expansion and leaving inflation below the target in the medium term was receding as” the expansion becomes more established, it said.

For other members, “although the domestic economy was growing at or above longer-term average rates, there was little indication of inflationary pressures building,” the minutes said. “A premature tightening in monetary policy might leave the economy vulnerable to shocks.”

Spare Capacity

New projections of spare capacity, growth and inflation will be published on August 13, when the BOE releases its quarterly Inflation Report. Carney put slack -- the economy’s scope to grow without setting off faster inflation -- at the center of policy earlier this year.

“The heat of the debate does seem to be rising,” said Neville Hill, an economist at Credit Suisse Group AG in London and a former U.K. Treasury official. “Given that the August Inflation Report is likely to be a catalyst for MPC members to reconsider views, we stick to our call of the first vote or votes for a hike occurring next month, and the first hike taking place in November.”

Berenberg Bank, Deutsche Bank AG and Goldman Sachs Group Inc. are also predicting the harmony on rates will end, with one MPC member voting for an increase in August. The key 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.

Pound Falls

The pound fell against the euro after the minutes showed the vote was unanimous. BNP Paribas SA had predicted a 40 percent chance of a dissenting vote being revealed today. Sterling depreciated 0.1 percent to 79.02 pence per euro at 11:22 a.m. London time, after appreciating as much as 0.2 percent before the report.

While futures markets are pricing in a quarter-point rate increase by February, the implied yield on short-sterling contracts expiring in March fell after the publication of the minutes, indicating traders were paring bets on that probability.

“Given the contradictory signals from employment and wages, uncertainty about the degree of slack had risen on the month,” today’s minutes said. “In light of this uncertainty, an argument could be made for putting more stress on the expected path of costs, particularly wages, in assessing inflationary pressures.”

Wage Pressures

Inflation rose to 1.9 percent in June, which may reflect the timing of summer sales, the bank said. Wage growth in the three months through May slowed to 0.3 percent, the lowest since May 2009, the latest official data show. Excluding bonuses, it slowed to 0.7 percent, the least since records began in 2001.

“The absence of wage pressure is leading committee members to feel under no strong pressure to start the process of normalization,” said David Tinsley, a former BOE official who’s now an economist at BNP Paribas in London. “Overall the MPC has few qualms about raising rates at early as 4Q this year, but it is not a done deal.”

The minutes showed the committee debated whether “the increase in employment over the past year would in due course feed into higher wages,” or whether lower wages were more permanent, with workers being “willing to accept lower hourly wages than before, work increased hours at the same pay rate, or extend their working lives.”

Overseas Demand

Other recent data suggest the recovery is maintaining its momentum, with unemployment sliding to the lowest level in more than five years in April. GDP probably expanded 0.8 percent in the second quarter, matching the first quarter’s growth, according to economists in a Bloomberg survey before a report due July 25.

“The ultimate strength of the expansion would depend in part on how resilient overseas demand was,” the minutes said. “If growth were materially stronger in the United Kingdom than in its main trading partners, this could widen the current-account deficit.”

“Sustained economic momentum was generally looking more assured,” the minutes said. First-half growth appeared to be “at or slightly above longer-term averages” though for the rest of the year “there were some tentative indications” of a “modest slowing” in output growth.

The slowdown was most evident in the housing market, officials said. While it was too soon to tell what impact the Financial Policy Committee’s measures announced last month would have, they may affect borrowers’ and lenders’ expectations.

Low Volatility

Overall “there was some expectation that, when the committee came to update its forecast, the outlook for activity in the housing market would be slightly less strong than it had previously thought.”

The minutes echoed Carney’s remarks from his Mansion House speech last month, where he said investors may not appreciate risks to their forecasts for rates.

“Market measures of uncertainty about future asset prices suggested that, for a wide range of assets, it was surprisingly low,” the minutes said. “Some increase in volatility was likely as the monetary stance became less expansionary in advanced countries.”

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