Carney Loses Rates Consensus as Bank of England SplitsJennifer Ryan and Scott Hamilton
Bank of England Governor Mark Carney lost his consensus on interest rates this month as two policy makers broke ranks and voted for higher borrowing costs.
In the first split on the benchmark rate in more than three years, Martin Weale and Ian McCafferty wanted to raise it by 25 basis points from a record-low 0.5 percent, according to the minutes of the Monetary Policy Committee’s Aug. 6-7 meeting. The remaining seven members, including Carney, opted for no change, saying early tightening could leave the economy “vulnerable to shocks” and jeopardize indebted households.
In their analysis, Weale and McCafferty said economic circumstances “were sufficient to justify an immediate rise in bank rate” and the MPC needed to move in advance of potential labor market pressure. They also said that even after a 25 basis-point increase, policy would remain “extremely supportive.”
The release of the voting record follows the publication of the BOE’s quarterly Inflation Report on Aug. 13, in which it cut its forecast for wage growth and said inflation would remain below the 2 percent target throughout its forecast period. At a press conference that day, Carney said it wasn’t yet time to begin tightening policy.
“An early rise would facilitate the committee’s aspiration that rises in bank rate should be only gradual,” the minority of the MPC said in today’s minutes. While there would be risks associated with the first rate increase since the recession, “it was unclear that these risks would be lessened, and indeed possible they would be augmented, by delaying that increase.”
The last time the MPC divided on interest rates was in July 2011, when Weale and former BOE Chief Economist Spencer Dale wanted a 25 basis-point increase.
Weale also voted against forward guidance in August 2013, which Carney introduced shortly after becoming governor. Apart from that opposition, the MPC has voted unanimously in all policy votes since Carney took over. Recent minutes showed MPC members diverging on the amount of slack in the economy and the outlook for inflation, increasing the chance of a split vote.
“It’s a sort of symbolic breaking of the Carney consensus,” said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London who correctly predicted a 7-2 split in today’s minutes. “At the most, there may be one more dissenter by November, but not necessarily. The others haven’t really shifted.”
The pound rose against the dollar after the minutes were published, and traded at $1.6649 as of 1:22 p.m. London time, up 0.2 percent from yesterday. Short-sterling futures indicate investors are expecting an increase in borrowing costs in May.
Economists in a Bloomberg survey published earlier this month predict that rates will begin to increase in the first quarter, based on the median projection.
For the majority of the MPC, there was “insufficient evidence of inflationary pressures to justify an immediate increase.” They said the pace of economic growth may cool, wage growth remained weak and slack could be eroded at a slower pace.
“There would be merit in waiting to see firmer evidence that solid increases in pay growth were in prospect before tightening,” the majority said.
The minutes also showed that, for some MPC members, the level of uncertainty about slack raised questions about its usefulness as a guide to policy. While Carney has put it at the center of his analysis, the MPC has a “wide range of views” on the amount remaining in the economy.
“We suspect that Weale and McCafferty will remain in the minority for a while,” said James Knightley, an economist at ING Bank NV in London. “Low inflation numbers, the lack of wage growth and concerns about euro zone growth -- the U.K.’s largest trade partner, suggest that in the absence of upside activity data shocks the majority will continue to opt for the status quo in the next few months.”
“It currently looks more likely to be February when we see the first rate rise than our current published forecast of November,” he said.