Bank of England Shift Toward Rate Increase Builds MomentumFergal O’Brien and Scott Hamilton
The Bank of England said a growing number of policy makers have become concerned about rising inflation pressures, indicating building momentum toward the first interest-rate increase in eight years.
“For a number of members, the balance of risks to medium-term inflation relative to the 2 percent target was becoming more skewed to the upside at the current level of bank rate,” the Monetary Policy Committee said in the minutes of its July meeting. For those officials, Greece was a deciding factor in keeping the key rate unchanged this month; exclude it and the decision on an increase was “becoming more finely balanced.”
The minutes indicate a further shift in the MPC’s thinking from June, when two members said the decision was finely balanced, and economists forecast a split will emerge in August. Governor Mark Carney has said the timing for the first move in rates would become clearer at the end of the year, and the Institute of Directors on Wednesday called on the BOE to start normalizing policy now.
The committee voted 9-0 for no change in the key rate this month, leaving it at 0.5 percent, according to the minutes published in London on Wednesday. The pound remained higher against the dollar after the report, trading at $1.5620 as of 11:04 a.m. London time, up 0.4 percent.
Sterling was already rising before the minutes on comments from BOE policy maker David Miles that inflation will probably accelerate “quite sharply towards the end of this year or the start of next year.”
Any interest-rate increases will be “gradual,” Miles, whose term on the MPC ends in August, said in an interview with Mortgage Strategy magazine. At an event in London late Tuesday, Carney said investors should keep the headwinds facing the U.K. economy in mind as the central bank considers raising rates.
In the minutes, the MPC said that domestic news “had generally been positive.” The panel noted stronger wage growth, though said that the impact of bonuses raised questions on the durability of the strength of the pickup.
The MPC had divergent views on the recent softness in labor market data, and whether that indicated a narrowing of the margin of spare capacity in the economy.
“Overall, committee members agreed that the domestic economy had continued to strengthen over the past year, that the margin of spare capacity had continued to shrink, and that domestic cost pressures had increased,” the minutes said.
‘On the Brink’
The report suggests “that at least a couple of its members are on the brink,” said Samuel Tombs, an economist at Capital Economics Ltd. in London. The MPC’s vote took place during the escalation in the Greek debt crisis and the easing of tensions since “may be enough to shift some members to vote to raise rates next month,” Tombs said.
At least one of the MPC’s nine members will vote next month to raise the key rate, creating the first split vote of the year, according to 65 percent of economists in a Bloomberg survey published on Tuesday. That’s up from 18 percent in June.
The minutes also showed that policy makers said the recent pickup in the pound would have a direct impact on inflation, though the “speed and degree” of the pass-through was unclear. Persistence in the drop in oil prices might also bolster the deviation of inflation from the target, the report said.
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